The GBP/USD exchange rate dived to its lowest level since May 2024 as the US dollar index surge gained steam. It dropped to a low of 1.2497, much lower than the year-to-date high of 1.3430 after the latest Federal Reserve and Bank of England (BoE) interest rate decisions.
Bank of England interest rate decision
The GBP/USD exchange rate continued falling as the Bank of England delivered a relatively dovish statement on Thursday.
The bank decided to leave interest rates unchanged at 4.75% as it remained concerned about the elevated inflation rate in the country.
Unlike the Fed and the European Central Bank, the BoE has already embraced a more gradual pace to interest rate cuts. It has slashed rates by just 0.50% this year, while the two other banks have cut by about 1%.
Still, there are signs that a more dovish tilt is emerging from the BoE as 3 officials voted to cut rates by 0.25%.
The BoE decision came a day after a report by the Office of National Statistics (ONS) showed that the headline Consumer Price Index (CPI) rose from 2.3% in October to 2.6% in November. Core inflation moved from 3.3% to 3.5%, still higher than the bank’s target of 2.0%.
The Retail Price Index (RPI) rose from 3.4% to 3.6%, while the harmonized inflation rate moved to 3.5%. These numbers meant that the country’s inflation remains stubbornly high and that the bank has room to leave rates unchanged for long.
UK is in a stagflation
The challenge, however, is that the UK is going through a stagflation process. Stagflation is a situation where a country goes through high inflation and slow economic growth. In theory, it is one of the most difficult situations to manage since cutting rates will lead to more growth, but cause inflation. High interest rates, on the other hand, hurt a country’s growth by limiting the economic growth.
Therefore, the GBP/USD pair crashed because analysts expect that the bank will be more dovish in the coming year. Most analysts expect it to cut rates by 55 basis points, while those at ING estimate that it will cut by 150 basis points. In a note, they said:
“The apparent growing dovish front within the MPC in spite of the latest hawkish wage data potentially suggests a greater focus on slowing activity. That reinforces our dovish view on the Bank of England for next year – we expect 150bp of cuts, against market expectations for around 55bp.”
The GBP/USD pair crashed also because of the hawkish Federal Reserve. In a statement, the Fed hinted that they will deliver two rate cuts in 2025, lower than the previous estimation of four. That hawkish tone pushed the US dollar index to the highest level in over two years.
GBP/USD technical analysis
GBP/USD chart by TradingView
The GBP/USD exchange rate has been in a strong downward trend in the past few months. It has recently formed a death cross pattern as the 50-day and 200-day moving averages crossed each other.
The pair has also moved below the lower side of the ascending channel. Also, it has moved to the support at 1.2497, its lowest point in November. Therefore, the path of the least resistance for the pair is bearish, with the next point to watch being at 1.2300, the lowest point in April this year.
The only short-term hope for the pair is that it has formed a small double-bottom pattern at 1.2497 and whose neckline is at 1.2800. That is a sign that it will bounce back soon.
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