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GBP/USD Weighed by Negative Interest Rate Comment From BoE Governor Bailey

Jignesh Davda

The pound to dollar exchange has come off its weekly highs with an important resistance confluence in play but continues to show a gain for the week thus far.

The currency pair declined on increasing speculation that the Bank of England will look to ease monetary policy further. In testimony to Congress on Wednesday, Bank of England Governor Bailey said that he has changed his position on negative interest rates a bit.

This is a sharp turn from his comments following the last BoE meeting where he signaled that other forms of easing are much more likely and that taking interest rates into negative territory was low on his priorities.

BoE’s Chief Economist Andrew Haldane had commented earlier in the week that the central bank is looking into different methods they can ease further with a bit more urgency. Haldane also confirmed that negative interest rates could be an option.

An important take away from the BoE comments this week as that they want to see how their previous rate cut has impacted the economy. Further, policy members intend to examine the effectiveness of negative rates which could take some time and suggests a rate cut could come later this year as opposed to the next meeting in June.

Survey data from purchasing managers in the UK showed some optimism on the back of the easing of lockdown measures. The composite PMI index rose to 28.9 from a record low of 13.8.

IHS Markit’s Chief Business Economist Chris Williamson had less of an optimistic outlook. He highlighted that the UK has been hit harder by COVID-19 than most other countries and that the easing of lockdown restrictions is taking place at a slower pace. He expects GDP to decline a staggering 20% in the second quarter and 12% this year.

Technical Analysis

GBPUSD 4-Hour Chart

GBP/USD has come lower from a resistance confluence at 1.2266. The confluence consists of a horizontal level that had previously held the pair higher in late April and early May as well as the upper bound of a declining trend channel.

The decline from this area yesterday could be marking the start of a bearish reversal although further confirmation may be had on a drop below the 1.2200 handle.

A breach above resistance, on the other hand, is likely to renew some of the bullish momentum seen earlier in the week.

From a broader perspectivef for GBP/USD, the break below 1.2266 last week activated a double top pattern. This technical pattern carries a measured move objective to just below the 1.1900 level.

Bottom Line

  • Several Bank of England members have discussed easing monetary policy further.
  • Bailey changed his view on negative interest rates yesterday after mostly disregarding it at the recent BoE meeting.
  • UK PMI figures improved but GDP is expected to decline sharply in Q2 as the UK has been hit harder by the Coronavirus compared to other countries.

This article was originally posted on FX Empire