GBP/USD Price Forecast: Can the Bank of England increase interest rate? 

• The GBP/USD fell dramatically on Friday, pulled down by broad-based US dollar strength.
• Markets are betting on a 15-basis-point rate hike at the November meeting, and they won’t be disappointed.
• On the technical front, the GBP/USD pair is gaining immediate support at the 1.3666 level.

The British pound fell dramatically against the US dollar to test the double bottom support level of 1.3666. The GBP/USD price forecast heavily relies on the Bank of England’s interest rate decision and its stance on tapering. This article will uncover everything we can expect from the Bank of England‘s monitory policy meeting.  

The British pound struggled to find support at 1.3665 lows in late US trading on Friday after falling more than 0.7 percent on the day. With the Federal Reserve meeting in November just around the corner, end-of-month actions have lifted the US dollar across the board.

The USD rises as the market anticipates a hawkish Fed statement. 

The GBP/USD fell dramatically on Friday, pulled down by broad-based US dollar strength. The surge in the US dollar was supported by a blend of moderate risk aversion and increased anticipation of a hawkish turn by the Federal Reserve next week.

After Core Personal Consumption Expenditures increased 3.6% year on year in September, investors may have been encouraged to reduce US dollar shorts. These numbers confirm the notion that the central bankers will be pushed to speed up its monetary normalization program, which has favored the US dollar. Higher inflation forecasts have also driven US Treasury bond yields higher, adding to the USD’s bullish thrust.

Overall, investors are bracing for a busy week next week, with the Bank of England meetings and the Federal Reserve slated. The Federal Reserve is supposed to unveil the end of its monetary stimulus, while the Bank of England is anticipated to raise interest rates for the first time in three years to combat inflationary pressures.

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Bank of England (BOE): What to expect?

Following recent hawkish comments, we anticipate a 15bp rate hike from the Bank of England next Thursday. Markets, however, exaggerate the magnitude of future tightening. We see some minor pushback from policymakers in the form of weaker medium-term inflation estimates and a split rate hike vote.

Expect a rate hike of 15 basis points.

Markets are betting on a 15-basis-point rate hike at the November meeting, and they won’t be disappointed. Economists are more divided, and we’d expected until recently that the MPC would want to delay any rate hikes until 2022. This would give time to examine the impact of the furlough scheme’s recent termination, among other things.

On the other hand, Governor Andrew Bailey has sent a clear message: he wants to act now and sees no purpose in waiting. In recent weeks, the lack of resistance to the ever-increasing amount of tightness priced into financial markets exemplifies this.

Waiting until December’s meeting would give policymakers more time to gather data, but it would also leave them without a post-meeting press conference or new predictions to explain their decision to the public, something the Bank takes very seriously. Thursday’s gathering appears to be a better fit in case politicians are eager to take action.

Is it possible that the Bank of England may raise rates by more than 15 basis points this time? Never say never, but it has the potential to open the floodgates for much further tightening to be priced into financial markets.

BOE tightening forecasts for 2022

In response to the market’s tightening forecasts for 2022, policymakers will likely offer some minor resistance. That leaves us to the question of whether regulators will try to push back harder on market pricing. 

We believe they will, albeit gently.

Markets currently appear to be overestimating the level of tightening expected next year. Investors believe rates will need to rise to 1.25 percent or higher, which is more than at any time before the financial crisis and higher than what the US Federal Reserve is expected to do, even though the US Federal Reserve’s inflation problem is arguably more severe. Next year, we estimate one or two rate hikes at most. 

Although there may not be any specific resistance in Thursday’s policy statement, there will be plenty of hints elsewhere.

GBP/USD price forecast – BOE unanimous voting

For newbies, if the committee decides to raise rates on Thursday, it will almost certainly be a unanimous vote. While we expect a few committee members to follow Governor Bailey’s lead and vote for a raise. Moreover, we also expect at least one member to vote against it (Silvana Tenreyro). 

This should serve as a caution to markets: if the first – partial – rate hike fails to win unanimous support, it will be difficult for a succession of subsequent aggressive moves to do so.

BOE Inflation Projections 

We could see a decrease in inflation projections over the next two/three years in terms of expectations. Remember that the Bank uses market interest rates to feed into its models. 

In August, the Fed tightened by 40 basis points across its projection horizon. It’s keeping inflation at roughly 2% in the medium term. With everything else being equal, the much higher degree of tightening (which is already priced into markets) should cause the inflation projection for 2024 to fall.

If this occurs, it will imply that policymakers do not believe it is necessary to respond as forcefully as the markets.

GBP/USD price forecast – Double bottom pattern to underpin

On the technical front, the GBP/USD pair is gaining immediate support at the 1.3666 level. This double bottom pattern extends this support on the 4-hour timeframe. 

On the bearish side, a breakout of 1.3666 can extend a selling trend until the next support level of 1.3585. A further breakout of the 1.3587 level could expose the GBP/USD pair towards the 1.3485 level. 

On the bullish side, the GBP/USD faces an immediate resistance level of 1.3710. A break above this level could lead the GBP/USD pair to the next resistance level of 1.3750.

In the 2 hour timeframe, the 20 and 50 days EMA is holding around the 1.3750 level. The closing of candles below this level supports a selling bias in the GBP/USD pair. 

Looking at the leading technical indicators like RSI and MACD, both are supporting a selling bias in the GBP/USD. The MACD has closed histograms below 0, which demonstrates strong selling in the

What’s next? 

Let’s keep an eye on the 1.3660 level, as closing above this level offers us the opportunity to go long. On the higher side, the target remains at the 1.3750 level. Conversely, the violation of the 1.3660 level can trigger a sell-off until 1.3587 and the 1.3480 level. Good luck, and stay tuned for more updates.