The pound traders are cautious ahead of the Bank of England’s policy meeting, which is scheduled for later this week.
The euro cross traced out a double top at 0.8595 and retraced below 20MA and the key support level located at 0.8450 levels. Whereas according to the hourly chart, the price has been developing an inverse H&S pattern. The neckline located at 0.8450 above this could allow the price to make a near-term bottom.
Data review: The UK offered 3M labor market data and monthly GDP figures.
- The estimated annual growth in average weekly earnings for employees in Great Britain remained unchanged at 3.2%. The UK unemployment rate was estimated at 3.8%, 0.2% points lower than a year earlier but largely unchanged on the previous quarter, ONS reported.
- January Flash Manufacturing PMI and Services PMI picked up from December figure. Following the better PMI figures, BOE’s rate cut probability fell to nearly 50.0% from 65.0%.
- At 49.8 in January, Flash UK Manufacturing Purchasing Managers’ Index picked up from 47.5 in December and was the highest since April 2019, IHS Markit reported.
- Turning to the Flash UK Services PMI, the index posted 52.9 in January, up sharply from 50.0 in December and the highest reading since September 2018.
The Bank of England meets on January 30, and we and the markets are widely expecting no changes in rates. The policy decision will be announced at 12:00GMT, and the press conference with President Draghi will commence at 14:00GMT. We suspect traders have a too aggressive repricing of rate cut forecast, especially after the recent GDP number. Whereas last week’s PMIs repriced the rate cut probabilities. We suspect likely to get a 5-4 vote in favor of rates unchanged.
Moody’s Analytics said, “Market-based expectations of an interest rate cut on January 30 are hovering just slightly above 50%.”.
Barbara Teixeira Araujo of Moody’s Analytics said, “A rate cut wasn’t even being considered a few weeks ago; it was only following a series of dovish MPC member’s speeches—including one from the governor Mark Carney—and some downside data surprises that markets abruptly awakened to the possibility of a move. Our baseline remains that the bank will refrain from cutting rates next week, but the truth is that any economic data released by next Thursday will play a significant role in the bank’s decision.”
Whereas in contrast, Danske Bank Said predicts a 25bps rate cut. This week’s research note reported that “Following a string of mixed data releases, we expect the BoE to cut rates by 25bp. However, it is likely to be a close call. The following day, on January 31, the UK officially leaves the EU.”.
ING noted that “Markets reckon there’s a 60% chance of easing, but we’re less convinced.”
James Smith at ING said last week, “We’re less convinced and think policymakers are more likely to ‘wait-and-see’ how the recent uptick in sentiment translates into activity before deciding on the action – although it is undoubtedly a close call.”
The outlook painted extremely bearish for the cross after losing the 0.8450 support last week. Whereas according to the hourly chart, the price has been developing an inverse H&S pattern. The neckline located at 0.8450 above this could allow the price to make a near-term bottom.
Under these conditions, keep an eye on 0.8450 which was earlier support and now shaped as a neckline, a breakout above this level would ignite the upward momentum, with a new target the resistance levels around 0.8500. In the case of dovish voting and headlines from BOE, the price could even extend the rise towards the recent double top located at 0.8600.
The daily RSI has been making a higher lower pattern, suggest the cross offers limited legroom (0.8380-0.8340). Ahead of this week’s BOE meeting, we are going to remain between 0.8340-0.8500, which is down from 0.8450-0.8600.
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