GBP/USD – A surprisingly dovish BoE but another rate hike still possible

• BoE leaves interest rates unchanged after 5-4 vote
• MPC statement suggests the tightening cycle may be over
• GBPUSD breaks major support after BoE decision

We’re certainly seeing plenty of different approaches from central banks as they wrap up their tightening cycles, with the Bank of England today surprising with a hold while not adopting a particularly hawkish tone alongside it.

That said, more important than the tone is just how close the vote was, with five policymakers – including Governor Bailey – voting to hold and four others backing a hike. That arguably puts this in into hawkish hold territory but what is interesting is the wide range of views within the committee that comes across in the statement.

I expect we’ll see a similarly tight vote at the next meeting, the outcome of which will be even more heavily driven by the data as there’s clearly no overriding consensus on the committee.

Two things that particularly stood out in the statement were the view that inflation has fallen a lot and is expected to continue to do so, and the choice of words with respect to how long rates will stay high – “sufficiently restrictive for sufficiently long”.

While you could argue it’s just a bit cryptic, it’s far from the message that rates will stay higher for longer we’re getting from the Fed, ECB, and others. I suspect a number of policymakers see the potential for rate cuts earlier in 2024 if data performs as expected.

Cable breaks key support after BoE pause

The pound was already trading around key support against the dollar ahead of the BoE and Fed decisions and today’s relatively dovish pause appears to have tipped it over the edge.

GBPUSD Daily

Source – OANDA on Trading View

A break below the 200/233-day simple moving average band and the 61.8% Fibonacci retracement level could be viewed as a very bearish move.

The next standout area of potential support could be 1.22, having previously been a notable area of support and resistance.

If the price does rebound higher, the next obvious test may lie around 1.24 around the 200/233-day SMA band. Should this offer resistance, it could be viewed as confirmation of the initial breakout, a bearish signal.

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