The pound paired with the dollar plunges. In just a few hours, the pound lost more than 200 points. If the GBP/USD pair was at the borders of the 37th figure before the results of the Bank of England meeting were announced, then at the start of the US session, the price dropped to the base of the 35th figure. Now the bears are already testing the area of the 34th price level, but here the downward momentum has begun to fade – at least if we talk about the first wave of the downward movement. But in general, yesterday's favorite of the foreign exchange market turned into an outsider, losing the positions won. Only a few hours were enough for the GBP/USD pair to update the monthly price low. And judging by the intensity of passions, bears are "on their way" to the middle line of the Bollinger Bands indicator on the MN timeframe, which corresponds to the 1.3410 mark.
By and large, the pound has become a victim of inflated expectations. Over the past few weeks, hawkish rumors have been circulating on the market that the BoE could raise the interest rate already at the November meeting, ahead of the US Federal Reserve in this regard. But the British central bank disappointed the hawks by stating that the date of the first round of rate increases has not been determined: much will depend on incoming data – primarily in the inflationary sphere and in the labor market.
That is why the market reacted so violently today to the results of the November meeting: the BoE did not meet the expectations of the GBP/USD bulls. Although by and large, the rhetoric of BoE Governor Andrew Bailey, was not categorical. For example, he stated that the rate "may need to be "raised" in the coming months" in order to return inflation to the target two percent level.
It should also be noted that three out of nine members of the Committee voted for the early curtailment of the government bond purchase program. Recently appointed Catherine Mann (instead of Gertjan Vlieghe) joined her colleagues - Dave Ramsden and Michael Saunders - in voting for a reduction in QE. Saunders has consistently voted for this decision since May of this year, and Ramsden since the September meeting. And now they were accompanied by Mann, who strengthened the hawk wing of the central bank. In her speeches, she repeatedly urged her colleagues to start the process of normalization of PREP as soon as possible. But at the same time, she did not dare to support the hawks on the issue of raising the rate. Only two people voted for this decision – Ramsden and Saunders. For the first time in many months, several members of the Committee called for tightening monetary policy.
But traders expected more. Much more. On the eve of the meeting, rumors were circulating in the market that the British central bank would raise the rate by 15 basis points already at the November meeting, which will be held this Thursday. In addition, some analysts assumed that in 2022 the BoE will also tighten the parameters of monetary policy – in May and November.
But Bailey made it clear today that such a scenario would not be implemented. Having maintained a wait-and-see attitude in November, he said that the BoE had never said that it planned to change policy at any particular meeting.
It is also necessary to pay attention to another Bailey phrase. Commenting on the future prospects of monetary policy, he noted that the English central bank does not have official data on the labor market after the collapse of the support scheme. We are talking about the so-called "Furlough scheme" for employees in the UK, according to which workers forced to stay at home due to the pandemic were paid up to 80% of their salaries. It began to be gradually phased out a few months ago, so it is not surprising that the members of the BoE wanted to look at the further development of the situation on the labor market after its full completion. Let me remind you that this Support Program, which has been in effect since March last year, has saved more than 11 million jobs. But in the summer, the "Furlough scheme" was decided to be gradually phased out: it completed its operation on September 30. At the same time, the latest data on the UK labor market were published for August (unemployment rate, wage dynamics) and September (an increase in the number of applications for unemployment benefits). Therefore, the members of the English central bank will be able to assess the state of the labor market without the influence of the incentive program towards the end of the year (the October unemployment rate will be published in December). This suggests that the BoE will consider raising the rate no earlier than February next year, that is, at the first meeting of 2022. Provided that the labor market and inflation do not disappoint the members of the English central bank.
The greenback also exerted additional pressure on the GBP/USD pair today, which is strengthening its positions throughout the market. The US dollar index jumped to a three-week high, reacting to the published data in the labor market. For example, a report published yesterday from the ADP agency came out in the green zone, reflecting an increase in the number of people employed in the private sector by 500,000. The dollar bulls were pleasantly surprised by another indicator. Thus, the growth rate of initial applications for unemployment benefits came out at around 269,000. This is the lowest value since March 14 last year. Such rosy figures on the eve of tomorrow's Nonfarm inspired dollar bulls, who organized a large-scale offensive throughout the market – including paired with the pound.
It should be noted here that the GBP/USD pair can take a timeout after such a large-scale and impulsive fall, demonstrating a corrective pullback. But if we talk about broader time ranges, the pair has not yet exhausted its potential for decline. The main support level is located on the middle line of the Bollinger Bands indicator on the monthly timeframe (1.3410). I believe that this target is the main target of the GBP/USD bears in the medium term.
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