GBP/USD – Pound Slips as BoE Trims Growth Forecast

GBP/USD has dropped considerably in Thursday trade. In the North American session, the pair is trading at 1.3140, down 0.63% on the day. On the release front, the Bank of England maintained interest rates at 0.25%, but also lowered its 2018 forecast for GDP and wage growth. Elsewhere, UK Services PMI improved slightly, with a reading of 53.8 points. This beat the forecast of 53.6 points. In the US, unemployment claims edged lower to 240 thousand in July, beating the estimate of 242 thousand. ISM Non-Manufacturing slowed down to 53.9, compared to the estimate of 57.4 points. This reading was well below the forecast of 56.9 points. On Friday, the US releases wage growth and non-farm payrolls, so traders should be prepared for some movement from GBP/USD.

After touching 11-month highs on Wednesday, the pound has reversed directions and erased this week’s gains. The currency reacted negatively as the BoE cut its growth forecasts for 2017, from 1.9% in May to 1.7%, and for 2018, from 1.7% to 1.6%. As well, the bank sharply cut lowered its wage growth forecast for 2018, from 3.5% to 3.0%. The BoE held rates at 0.25%, but the minutes from the policy meeting were dovish, with MPC members warning that “GDP growth had been sluggish and was expected to remain so in the near term.” The BoE’s pessimistic message has dashed hopes of a rate hike before the end of the year, although the bank suggested that a slight improvement in growth could lead to a rate hike in 2018. BoE policymakers have publicly argued about monetary policy, and the vote at Thursday’s meeting, 6 members favored holding rates, while only 2 members voted to raise rates. The British economy has slowed down, but the bank is reluctant to raise rates when inflation is running at 2.6%, well above the bank’s target of 2%. To complicate matters, the Brexit talks have made little progress, raising fears of a messy exit from the EU, which could take a serious toll on the British economy.

Earlier in the year, the Federal Reserve all but promised to raise interest rates three times in 2017. However, the Fed has pressed the rate trigger only twice, and a third hike remains in doubt, with current odds under 50%. Inflation has remained stubbornly low, despite a strong labor market. In June, Fed Chair Janet Yellen said that factors causing weak inflation were “transient”, but there are no signs that inflation will pick up anytime soon. With the Federal Reserve unlikely to raise rates before December, investor attention has shifted to the Fed’s balance sheet, which stands at $4.2 trillion. Fed policymakers have broadly hinted at reducing purchases of bonds and securities starting in September, but San Francisco Fed President John Williams was more forthcoming about the Fed’s plans, likely aimed at giving notice to the markets. In a speech on Wednesday, Williams said that the economy had “fully recovered” from the 2008 financial crisis and called on the Fed to start trimming the balance sheet “this fall”. Williams added that the process would be gradual and would take four years to reduce the balance sheet to a “reasonable size”.  On Wednesday, two other FOMC members also came out in support of starting to taper the balance sheet – St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester.

Markets Shrug Off BoE Interest Rate Warnings

GBP/USD Fundamentals

Thursday (August 3)

• 4:30 British Services PMI. Estimate 53.6. Actual 53.8
• 7:00 BoE Inflation Report
• 7:00 MPC Official Bank Rate Votes. Estimate 2-0-6. Actual 2-0-6
• 7:00 BoE Monetary Policy Summary
• 7:00 BoE Official Bank Rate. Estimate 0.25%. Actual 0.25%
• 7:00 BoE Asset Purchase Facility. Estimate 435B. Actual 435B
• 7:00 MPC Asset Purchase Facility Votes. Estimate 0-0-8. Actual 0-0-8
• 7:30 BoE Governor Mark Carney Speaks
• 7:30 US Challenger Job Cuts. Actual -37.6%
• 8:30 US Unemployment Claims. Estimate 242K. Actual 240K
• 9:45 US Final Services PMI. Estimate 54.2
• 10:00 US ISM Non-Manufacturing PMI. Estimate 56.9. Actual 53.9
• 10:00 US Factory Orders. Estimate 2.9%. Actual 2.9%
• 10:30 US Natural Gas Storage. Estimate 23B

Friday (August 4)

• 8:30 US Average Hourly Earnings. Estimate 0.3%
• 8:30 US Nonfarm Employment Change. Estimate 181K
• 8:30 US Unemployment Rate. Estimate 4.3%

*All release times are EDT

*Key events are in bold

GBP/USD for Thursday, August 3, 2017

GBP/USD August 3 at 11:05 EDT

Open: 1.3223 High: 1.3268 Low: 1.3111 Close: 1.3139

GBP/USD Technical

• GBP/USD showed little movement in the Asian session. The pair posted considerable losses in the European session and continues to lose ground in North American trade
• 1.3121 was tested in support earlier and is a weak line
• 1.3238 is the next resistance line

Further levels in both directions:

• Below: 1.3121, 1.3058, 1.2946 and 1.2865
• Above: 1.3238, 1.3347 and 1.3480
• Current range: 1.3121 to 1.3238

OANDA’s Open Positions Ratio

GBP/USD ratio is showing little movement in the Thursday session. Currently, long positions have a majority (59%), indicative of trader bias towards GBP/USD reversing directions and moving upwards.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.