GBP/USD: playing with trend lines as BOE rate hike bets drop

The GBP/USD pair fell to 1.4907 levels today and appears poised to take out 1.4895 levels as anticipated here (https://www.fxstreet.com/analysis/macro-scan/2015/12/15 ) ahead of the FOMC rate decision.

BOE to lift rates in Feb 2017

In the past, a rate hike by the Fed was followed by the Bank of England within a period of 3-4 months. The markets were expecting the BOE to do the same till September 2015. Even the Bank of England governor Carney was talking about the possibility of the rate hike at the turn of the year.

However, the situation has changed in the Q4 2015. The BOE took a dovish turn via its quarterly inflation report. The odds appear stacked against the BOE liftoff due to –

• Worsening balance of payments

• Low inflation

• Dismal growth in earnings

• UK economy’s vulnerability to commodity sell-off – job losses in mining and energy sector

• Brexit Vote

Sonia points to BOE liftoff in Feb 2017

The Sterling Overnight Index Average or Sonia forwards show the traders are fully pricing in a 25 basis points in February 2017., which means the traders expect the BOE this time to lag the Fed liftoff by 14-months.

GBP/USD – Galore of Trendlines

Bearish moves in 2015 – Sterling failed to break above the inverted head and shoulder formation and has been moving in a falling channel since late August.

Heading into the event, the traders could take the note of the following trend line levels that could decide the trend in the pair.

1. The pair is moving in a falling channel represented by

   a. Black lines – resistance around 1.5255 & support at 1.4940 breached today

   b. Violet lines – resistance around 1.5080 & supports at 1.48

2. A daily close below 1.4940 would open doors for a drop to 1.48 levels. A break below 1.48 would expose 1.45 levels.

3. A recovery back above 1.4940 could see the pair re-test 1.5080 (confluence of Violet channel and Dark blue trend line). A break higher could see the pair move towards 1.5150-1.5160 (Red trend line).

4. The outlook would turn bullish only if Sterling breaks above channel resistance (black) currently seen at 1.5255.

Given the hawkish Fed dot chart, which pointed to 4 rate hikes next year and the falling BOE rate hike bets, the odds of the pair dropping below 1.48 and moving towards 1.45 levels are high.

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