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GBP/USD: Pound in the hands of the Bank of England

Relevance up to 08:00 2021-11-06 UTC–4

Will the Bank of England raise the repo rate at the November 4 meeting? Money markets believe that yes, predicting its growth to 1.25% by the end of 2022. Bloomberg experts, no, as it could slow down the already slowly rising economy of the UK. What will be the result of the MPC meeting and how will the pound react to this or that verdict? Every first investor racks their head about this.

Judging by the dynamics of British bond yields, the factor of the first act of monetary restriction has already been taken into account in the sterling rate. Indeed, it is difficult to expect more hawkish rhetoric from BoE than is currently implied in the quotes of financial instruments. Deutsche Bank is confident that the Bank of England will go even further – it will not only begin the cycle of raising the repo rate but also complete the quantitative easing program a month earlier than forecast. In addition, the regulator can give a signal about the growth rate of borrowing costs.

Investec believes that most members of the Monetary Policy Committee will consider that there will be no particular harm in raising the rate by 15 basis points. But if the Central Bank does not do this, trust in it can be seriously shaken.

Unlike the debt market, the urgent market, on the contrary, does not expect active action from the Bank of England at the meeting on November 4 – the risks of a reversal in the pound are at their lowest levels over the past few months.

Dynamics of Repo Rate Expectations and Pound Reversal Risks

As a result, the so-called binary result is returned to the UK. Previously, a referendum on Scotland’s membership in the United States, Brexit, and other events went along the same path. Currently, the situation for GBPUSD is complicated by the fact that the US dollar looks very good. And if the Bank of England refrains from active action, the pair will surely collapse. It’s another matter if it accepts them.

Strong statistics on the index of personal consumption expenditures, which rose to 4.4% in September, the highest level since 1991, as well as on average salaries of Americans for the third quarter returned interest in the dollar. Moreover, it has such potentially bullish drivers on its nose as the FOMC meeting and the release of US labor market data for October. In the first case, no one will blame the Fed for a more aggressive tapering of $120 billion of QE, in the second, employment growth outside the agricultural sector, the 450,000 expected by Bloomberg experts, is good news for the US currency.

Thus, whether the GBPUSD bulls will resist their opponents depends entirely on the Bank of England, or rather on Ben Broadbent and John Cunliffe, who have not yet expressed their opinion on the repo rate hike. So far, investors expect that two more supporters of monetary restriction, including Andrew Bailey, will join the two MPC hawks. There are three doves on the opposite side of the barricades.

Technically, the drop in GBPUSD quotes below fair value and moving averages suggest that the bulls are weak. Sell the pound on the rebound from 1.3755 and on the breakdown of the support at 1.365. On the contrary, growth above 1.378 is a reason to take a closer look at purchases.

GBPUSD, Daily chart

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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