GBP/EUR at 1.2000 in Wake of Surprise Move by BOE; Where Next For GBP Pairs?

The Bank of England (BOE) decided to keep interest rates unchanged at their rate meeting on Thursday, snubbing the opinions of most analysts, who had expected a quarter percent cut, and sterling rose

Officials at the Bank of England (BOE) decided to keep interest rates unchanged at 0.5% on Thursday, by a majority vote of 8-1, according to the minutes of the meeting which were released alongside the policy announcemen today.

This was in contrast to more dovish expectations of a 0.25% rate cut -  or even 0.50%, held by the majority of analysts.

The BOE also kept asset purchases unchanged at 375bn.

The pound rose by over 1.6% in the minutes after the announcment, reaching 1.3370 versus the dollar and 0.8306 against the euro.

These early, knee-jerk gains were partially given back later, however, after it became clear that the BOE were still intending to cut rates in August. 

"Most members of the Committee expect monetary policy to be loosened in August. The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report." Said the BOE policy summary.

Leading market expert Kathy Lien, of BK Asset Management, said that the sentence in the BOE summary which said they discussed, "a range of policy measures," was an indication a mixture of QE and a rate cut might be unveiled in August.

"What is interesting to us is that they discussed a “range of possible stimulus measures”, which suggests that come August, we may see a rate cut combined with more Quantitative Easing. For the 3 next weeks, GBP rallies should be sold." She wrote.

Where now for the Pound?

Following the BOE rate meeting we take a look at where next for the major GBP pairrs.

GBP/EUR

The pound to euro rate has pulled back to 1.2000 after spiking to a peak of 1.2124 following the monetary policy meeting on Thursday.

Despite the exchange rate then pulling back, the chart looks more likely to continue higher in the near-term, rather than fall.  

This comes despite the dominant down-trend established after the referendum result.

There is also confirmation from the MACD indicator in the bottom pane that the pair could be about to start a trend higher, after it crossed its signal line.

If the exchange rate can manage to supersede its 1.2124 highs then that will open the way to a stronger recovery up to the monthly pivot PP at 1.2350 – a level where the rate often stalls or bounces, due to traders clustering counter-trend orders around it.

Associated Foreign Exchange’s (AFEX) research desk are also bearish - saying:

“Despite immediate oversold readings the short to medium trend here remains firmly negative with lower targets thus readable in coming sessions. Some buying interest has been met at 1.1600 but both this and the psychological 1.1500 level appear vulnerable to attack next.”

GBP/USD

The pound to dollar rate is showing upside potential after forming a possible small inverse head and shoulders (H&S) reversal pattern at the lows.

This pattern could be signalling more gains up to a potential target at 1.3800, where the monthly pivot (pp) is situated.

MACD is crossing its signal line – more evidence the pair might be reversing and going higher.

A break above the neckline at 1.3500 has almost occurred confirming a move higher, to the aforesaid target.

Commerzbank’s Karen Jones sees the pair as correcting higher, but likely to go even higher:

“This correction higher looks set to extend further than we originally thought and we should allow for a rally to 1.3638, the 38.2% Fibonacci retracement and potentially 1.4158, the 61.8% retracement of the recent sell-off.”

Lloyds’s Wilkins is more balanced, seeing more up or downside:

“Resistance is between 1.3480-1.3525. A move above could see an extension towards 1.3650, but given the prevailing uncertainty, this seems unlikely. A break below 1.3325 followed by 1.31 is needed to open up the downside.”

EUR/GBP

Whilst the initial reaction on seeing the chart is that the up-trend is dominant, we actually see more downside on the horizon, with a possible break below the post-BOE lows at 0.8258 confirming a continuation down to the monthly pivot (PP) at 0.8110.

The monthly pivot is likely to slow further losses as it is a level traders often use to reference the market, and therefore attracts a lot of supply.
Commerzbank’s Jone’s also sees a downside bias:

“No change EUR/GBP remains near term downside corrective and the Elliot Wave count on the daily is pointing to a 0.8229/0.8110 retracement prior to recovery.”

Lloyd’s commercial banking’s Robin Wilkins sees the pair “supported” in the 0.8235-50 zone, revealing a bias for more upside:

“The pair should now be well supported by the 0.8250/35 area, with key trend support below at 0.8150-0.7950. Resistance on the day may be met at 0.8390-0.8405, ahead of 0.8490-0.8550 and range highs at 0.8625/30.”