• GBP/USD has lost its traction ahead of the Bank of England's (BOE) policy announcements.
  • Markets expect the BOE to hike its policy rate by 25 basis points.
  • The vote split and Governor Bailey's comments on policy outlook will drive the pair's action.

GBP/USD has lost its traction and retreated to the 1.2550 area early Thursday after having gained more than 100 pips late Wednesday. The pair faces a two-sided risk in the short term depending on the Bank of England's (BOE) policy announcements. 

The BOE is widely expected to hike its policy rate by 25 basis points in May. When the bank decided to raise the rates in March, one member of the Monetary Policy Committee (MPC) voted against the decision, triggering a GBP selloff. It wouldn't be a surprise if John Cunliffe, the dissenter in March, were to vote to keep the rates unchanged. If more members do the same, the British pound could come under heavy bearish pressure.

On the other hand, in case some members vote for a bigger-than-25 bps rate hike, that would be bullish for GBP/USD and trigger a fresh leg higher in the pair.

Bank of England Preview: Bailey set to bring sterling down with dovish hike.

In addition to the vote split, Governor Andrew Bailey's comments on the policy outlook will be watched closely by market participants. The BOE needs to find the right balance to ensure that the economic activity remains healthy as the bank tightens its policy to tame inflation. If Bailey suggests that they will wait and see how the economy evolves after four straight rate hikes before deciding on the next policy step, that could be seen as a dovish development and cause GBP/USD to continue to push lower. 

In the meantime, the greenback is holding following Wednesday's Fed-inspired selloff. FOMC Chairman Jerome Powell said after the bank's decision to hike the policy rate by 50 bps that they were not actively considering 75 bps hikes in upcoming meetings, causing US T-bond yields and the US Dollar Index to stage a deep downward correction. Nevertheless, the pound's market valuation should remain the primary driver of the pair's action on Super Thursday.

GBP/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart retreated to 50 in the early European session on Thursday, confirming that the pair has already lost its recovery momentum.

With a hawkish BOE hike, the pair could target 1.2600 (psychological level, 50-period SMA) and 1.2660 (Fibonacci 38.2% retracement of the latest downtrend). A daily close above the latter could be seen as a bullish development and open the door for additional gains toward 1.2750 (Fibonacci 50% retracement).

On the downside, 1.2500 (psychological level) aligns as the first support. A cautious policy tightening outlook could cause the pair to break below that level and fall toward 1.2420 (static level).

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