GBP/USD Forecast: Three reasons why the surprise BOE cut is pound-positive, levels to watch

Double-dose surprise cut – again – but the currency is not suffering, and for good reasons. Eight days after the Federal Reserve surprised with a double-dose and unscheduled rate cut, the Bank of England has followed with its own. The Monetary Policy Committee has announced it is slashing borrowing costs by 50 basis points to 0.25% – placing interest rates at the historic lows. 

GBP/USD initially tumbled below 1.29 and hit 1.2827, but recovered swiftly and for good reasons.

Three reasons for a potential pound rise

1) Priced in: Both outgoing BOE Governor Mark Carney and Andrew Bailey who takes over next week had stated that they are ready to act in face of the severe coronavirus crisis. While they seemed relatively calm in their statements, it was clear that a move was on the cards. After the initial shock from the timing, investors seemed to recall that bond markets had already foreseen monetary stimulus. 

2) Lending scheme: The "Old Lady" not only slashed interest rates but also launched a lending scheme worth £100 billion to small and medium-sized businesses. This kind of additional stimulus could provide a cushion to the economy at times of trouble, as consumers are stuck at home.

3) Coordination with the government: While the BOE announced its cut outside its calendar of rate decisions, the decision comes just hours before the UK government presents its budget. Chancellor of the Exchequer Rishi Sunak – only four weeks on the job – is on course to provide a significant increase in expenditure. Additional spending was already planned in order to fulfill Prime Minister Boris Johnson's infrastructure promises and also to mitigate the fallout from the crisis. 

See UK Budget Preview: Showing the way with fiscal stimulus? GBP/USD has room to rally

Moreover, the UK Gross Domestic Product for January came out flat, worse than +0.2% expected. Industrial output data also fell short of expectations, vindicating the BOE.

US developments

Moreover, the pound's recovery against the dollar also comes as President Donald Trump failed to appear to the White House's press conference about US fiscal stimulus. US markets had rallied on reports that Washington is preparing substantial tax cuts and other measures, but stocks turned down after Trump's "no show." The rush back into bonds weighed on the dollar. 

Later in the day, US Treasury Secretary Steven Mnuchin testifies on Capitol Hill and may provide details on what the administration plans. 

Coronavirus has already claimed the lives of over 4,200 people worldwide, with infections topping 110,000. Large gatherings are canceled and travel restrictions are imposed everywhere. 

Markets have shrugged off another successful night for Joe Biden over Senator Bernie Sanders. A victory for Biden, a centrist, is mostly priced in.

The US releases Consumer Price Index figures for February later in the day, with Core CPI set to remain at 2.3% yearly. 

See US CPI Preview: Oil disinflation coming?

Overall, coronavirus headlines and policy responses are set to move markets more than anything else. 

GBP/USD Technical Analysis

Momentum on the four-hour chart has turned negative, but pound/dollar managed to recapture the 50 and 100 Simple Moving Averages and trades only marginally below the 200 SMA. Overall, the picture is mixed.

Support awaits at the daily low of 1.2827, followed by 1.2775 which was a low point in early March. The 2020 trough of 1.2725 is the downside target.

Initial resistance is at 1.2950, which has played a role in both directions in recent days. It is followed by 1.3020, which held GBP/USD down in late February, and then by 1.3070, a former double-top from last month. Monday's peak at 1.32 is next.