GBP/USD meets critical resistance ahead of BoE

At 1.3440, GBP/USD is firm in Asia but is facing a wall of technical resistance in the build-up to the Bank of England this Thursday. There are hawkish expectations that have been priced into sterling but the improving trend in net GBP positions has come to an abrupt halt, as analysts at Rabobank explained in a note on Tuesday.

''Improving trend in net GBP positions has come to an abrupt halt with net shorts rising last week despite expectations of a February rate hike from the BoE. The money market has been positioned for a fair amount of tightening this year,'' the analysts elaborated. ''That said, fears of a spike in the cost of living in the UK questions whether the BoE be able to match these expectations.''

Nevertheless, the spot market could come unstuck, in tune with positioning ahead of the remaining sessions leading up to the meeting, especially if the US dollar can catch a corrective bid. The US dollar fell around 70 pips on Monday, as investors consolidated gains ahead of the closely-watched monthly Nonfarm Payrolls report this Friday, taking a pause after a furious rally that took the currency to a 1-1/2-year high on Friday. Technically, the index, however, looks poised for a downside extension on the hourly chart as follows:

In such a scenario, the pound will benefit, but there are unlikely to be any fast moves this week before the critical events on both sides of the pond. 

The Old Lady meets Thursday. Reuters said in a note on Monday that most economists polled by the news agency expect the BoE to raise rates to 0.5% on Feb. 3 from 0.25%. ''Reaching the 0.5% threshold would also see the bank stop reinvesting maturing gilts and start to reduce its 875 billion-pound government bond holdings.''

''Some reckon the BoE will be even more hawkish than anticipated; Goldman Sachs predicts interest rates at 1% in May and 1.25% in November to show 'the MPC (Monetary Policy Committee) is serious about the inflation target, and will act to ensure the UK does not face the risk of a wage-price spiral.'''

GBP/USD technical analysis

The daily chart shows an imbalance of price to the downside that is yet to be mitigated. A rebound in the greenback would see to that. The bulls have also reached a critical layer of resistance which is being tested. The bears will be prudent to monitor price developments from a lower time frame for bearish structure:

The 4-hour structure is bullish, however, and a break of 1.3450 would likely seal the deal for a run on stops around the psychological 1.35 round level.

1.3525 could be tested at a stretch as the last defence for a significant reversal of the current bearish trend. If, on the other hand, the bears beat down the doors, the dynamic support would come under pressure and a break of there would expose 1.3350 and lower towards 1.3240.