Where now for GBP/USD ahead of the BoE?

The Bank Of England is set to deliver its latest monetary policy decision on Thursday. With little expectation of a shift in policy, we will instead see the focus rest upon whether the markets should be bringing forward expectations for when we finally do see rates change. The past week has provided much to chew on for pound traders, with the UK election returning a weakened Tory government. Meanwhile, the deterioration in wage growth set against a spike in CPI inflation means that there is growing pressure on the BoE which continues to hold rates at rock bottom levels. Given the uncertainty of Brexit negotiations, it seems unlikely that we will see the BoE raise rates before the deal is completed in two years. For now there is more of a neutral tone to the BoE. However, given recent events, it makes sense to keep an eye out for any shift in tone within the MPC minutes.

Looking at the pound, it has performed remarkably well since the UK election, thanks in part to the weakness evident in the US dollar. However, with the election confusion came two positives for the pound. Firstly, the significant losses for the SNP have lowered the chance of a second referendum in the Scotland. Secondly, it is unlikely we will such a hard stance taken by Theresa May to Brexit negotiations from now on. The inability to gain a strong majority means that any questionable decisions taken over the Brexit will likely be shot down in parliament. This feeling that we will see a softer Brexit is helping push things along nicely this week for GBP/USD. The worry for sterling bulls is that the wider picture doesn’t look so rosy, as evident from the monthly chart below. The trend is clearly bearish, with price having rallied into a potentially important historical trendline.