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GBP/USD Slides Ahead of BoE Decision

Volatility continues today as traders are getting ready for the Bank of England monetary policy decision.

The greenback quickly recovered from yesterday’s post FOMC selling, and the dollar index was down notably, pushing the GBP/USD pair half a percent lower. At the time of writing, it was seen at around 1.3630, falling toward the critical support of 1.36.

Will BoE surprise?

The day’s main event is the Bank of England monetary policy decision, due at 13:00 CET. The official consensus is for everything to remain the same, with the primary rate expected to stay at 0.1%. Analysts think that 3 out of 9 MPC members will vote for a rate hike , which is insufficient for the BoE to raise rates.

However, according to the economists at Bank of America (BofA), the Bank of England will raise the benchmark interest rate by 15 basis points (bps) today.

We expect a 6-3 BoE vote to hike Bank Rate 15bps. We also think that BoE forecasts and communication are consistent with fewer/slower rate hikes than the market prices. With the market now fully priced for a 15bp rate hike, the risks are obviously skewed towards disappointment and a GBP sell-off, they added.

Latest FOMC decision

On Wednesday, the FOMC announced that tapering begins in mid-November with a 10 billion USD drop in Treasurys and 5 billion USD in Mortgage-Backed Securities , then declining by 15 billion USD every month.

Despite no mentions of incoming rate hikes, the market has turned even more hawkish, implying more than two rate hikes by the end of next year and pulling forward the first rate-hike expectations to June from September.

On the other hand, the bond market is also pricing a policy error as short-term yields continue to rise, but long-term yields seem to have peaked . Therefore, the yield curve is collapsing and flattening notably, usually indicating an incoming recession.

Later in the day, investors will focus on the usual Thursday’s jobless claims, expected to improve slightly. Additionally, unit labor costs for the third quarter are due, forecast to soar sharply to 5.2%, up from 1.3% previously.

As previously mentioned, the 1.36 zone could once again serve as crucial support. Larger stop losses could be hit if the Pound drops below it, potentially sending the pair toward September lows near 1.3450.

Alternatively, the resistance is found at yesterday’s highs at 1.37, and if not defended, sterling might advance toward 1.38 again.

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