GBP/USD in danger of breaking 1.50 as BoE turns more dovish

The two dissenters at the Bank of England finally changed their minds, meaning the MPC voted unanimously for interest rates to remain on hold at the first policy meeting of 2015. Minutes from the MPC’s last meeting, held earlier this month, have revealed that Martin Weale and Ian McCafferty both dropped their calls for a 25 basis point rise in interest rates, joining the other seven MPC members in voting to keep interest rates unchanged at 0.5%. The news weighed heavily on the pound and overshadowed data which pointed to further strength in the labour market. As expected, average earnings rose by an annualised rate of 1.7% in the three months to November, up from 1.4% previously, while the rate of unemployment fell surprisingly sharply to 5.8% from 6.0%. What’s more, the data for the month of December was also strong as jobless claims fell by a good 29,700 applications which were somewhat more than November’s total (29,600) and also higher than the consensus expectations (24,200). The overall impact of this morning’s news on the pound has been negative so far, suggesting the market’s focus has turned to a dovish MPC which makes a rate hike this year even less likely. Going forward, inflation data will be watched ever closely after it dropped to just half a per cent in December. If CPI continues to fall or remain low, say as a result of prolonged weaker oil prices, then interest rate hike expectations could be pushed further out and that could really hurt the pound, especially against currencies where the central bank is still in a hawkish mode e.g. the US and New Zealand dollars.

That said, the GBP/USD is currently testing or approaching some major long-term support levels, which may help to limit the falls. As can be seen from the monthly chart (figure 1), a trend line from 1985 going through the wicks of the monthly candles of more recent years is being tested around the 1.5075 area. This is also where the Cable has shown some strength if you look at an intra-day chart. Although the GBP/USD yesterday found strong support from here and went on to form a bullish engulfing candle on the daily chart (figure 2), it has so far remained within the range of yesterday’s price action. Thus a potential break outside of yesterday’s range could trigger a batch of stop orders and potentially lead to a sharp move in that direction. Given that the BoE is now more dovish than previously thought, the Cable is likely to be under more pressure from the sellers rather than buyers. So, a break below 1.5075 could easily lead to a drop to the psychological 1.50 handle in the very short term. Possible profit-taking there may lead to a bounce of some sort, should we get there. However if 1.50 is also broken down then the bears could target the very long-term 61.8% Fibonacci retracement level of the 2009-2014 bull trend at 1.4910 or even the 2013 lows of around 1.4810/30. Meanwhile a break above 1.5200 could lead to a rally towards resistance at 1.5265 and a break above that level may pave the way for 1.5500.