GBP/USD Forecast: BOE's outlook downgrade may hit sterling after losing support

- GBP/USD has been on the back foot as tension mounts ahead of the BOE

- Concerns about trade talks and election speculation are set to impact as well.

- Thursday's four-hour chart is showing uptrend support is broken.

Will the central bank add to the pound's misery? Sterling seems vulnerable as the Bank of England is set to leave interest rates unchanged The Monetary Policy Committee's meeting minutes are set to show a unanimous vote, but one vote for a rate cut cannot be ruled out. Several MPC members have been dovish of late.

The Quarterly Inflation Report (QIR) is what makes this "Super Thursday" special. Investors will be watching the BOE's new inflation forecasts, which will likely show a dimmer outlook for price development. 

Last but not least, Mark Carney, Governor of the Bank of England, will hold his last post-QIR press conference. The Canadian central banker is stepping down at the end of the year and his successor is yet to be named. 

GBP/USD volatility is set to rise around the event. 

See BOE Preview: Three reasons why Carney's last Super Thursday may send the pound down

Elections and trade troubles

The BOE's decision temporarily removes the focus from the December 12 elections. With 35 days to go, Prime Minister Boris Johnson's Conservatives remain in the lead, but their 12 point advantage over Labour is far from guaranteeing an absolute majority. The Tories have suffered from several gaffes while the left-leaning opposition saw its deputy leader Tom Watson stepping down. Watson is a staunch pro-Remain MP and has been seen as a moderating voice in Labour. 

The Liberal Democrats and the Brexit Party – which have the clearest views on Brexit – have been unable to capitalize on the main parties' struggles.

The US-Sino trade deal may have to wait until December – a sign that talks have run into trouble. China has reportedly upped its demands for tariff removals, while the US insists that a summit between Presidents Donald Trump and Xi Jinping must take place on American soil.

Markets had already priced in accord, and Wednesday's news of a postponement has pushed stocks lower. The news seems to have had a minimal effect on pound/dollar, but further developments may impact it.

A fresh report suggests that the world's largest economies have agreed on a phased tariff reduction.

Overall, the BOE's Super Thursday and political news are set to rock pound/dollar today.

GBP/USD Technical Analysis

Sterling has dropped below the uptrend support line that has been accompanying it since mid-October. Momentum on the four-hour chart is to the downside and the currency pair has failed to recapture the 50 and 100 Simple Moving Averages. 

All in all, bears are in control. 

Support awaits at 1.2785, which was a low point in late October. It is followed by 1.2750, 1.2705, and 1.2655, which were all stepping stones on the way up.

Some resistance awaits at 1.2850, which provided support on Wednesday. Next, we find 1.2920, a support line from late October, followed by 1.2950, a resistance line from back then, and finally by 1.2980.

BOE Background – Why the inflation outlook matters

The Bank of England sets interest rates eight times a year but releases its inflation report only four times. These decisions are dubbed "Super Thursday." The BOE's long QIR includes outlooks for inflation, employment, and growth and in itself, provides a hint for future monetary policy. 

The bank's fan chart of inflation reflects the potential paths of price development – and thus serves as a rough guide to the next path of interest rates in the next three years. The Governor also adds his explanations in the press conference. 

In recent years, the BOE has stated that it foresees gradual and limited rate rises. Since Brexit, the BOE has hiked rates twice, from 0.25% to 0.75%. The overnight lending rate is still below headline Consumer Price Index, which stood at 1.7% in September. Nevertheless, the "Old Lady" as the central bank is known, has been hesitant to change its policy amid Brexit uncertainty. 

Apart from the BOE, trade developments remain important as ever. 

More US-China trade and the global economy: Q&A with FXStreet senior analyst Joseph Trevisani