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GBP/USD analysis: Short-term weakness, long-term potential strength...?

GBP/USD analysis

The Bank of England made the decision to keep interest rates steady at 5.25% during Thursday's session. Governor Andrew Bailey acknowledged the substantial headway made in combating inflation, which saw a decrease from 10% to 4%.

While this shift suggests a positive trajectory, Bailey underscored the importance of exercising cautious optimism. The primary objective remains achieving inflation stability at the targeted 2% level before contemplating any potential adjustments to interest rates.

Following the announcement of the Bank of England's decision, Governor Bailey elaborated during a press conference, emphasizing the appropriateness of the current interest rate level.

However, he emphasized that any future decisions on possible rate cuts would be contingent on incoming economic data. Policymakers aim to ensure that they have effectively reduced inflation to the desired 2% level.

Bailey articulated a shift in the key question from determining how restrictive the policy should be to evaluating the duration of maintaining the current stance. He acknowledged the persistent nature of inflation in service prices, complicating the situation.

Bailey assured that the decision and the central issue revolved around how long the current policy should be upheld, emphasizing that it wouldn't be prolonged beyond the necessary duration to achieve the primary goal of maintaining inflation at a steady 2%.

Although inflation in the UK has receded more rapidly than anticipated by the Bank of England officials, sustaining this positive trend remains pivotal. Notably, the current progress prompted the removal of the statement from the communication suggesting a rate hike was more likely than a rate cut.

Analysts expressed the view that the Federal Reserve's first rate cut in this cycle is likely to materialize in June. This inclination implies a potential risk of further appreciation of the dollar in the one to three-month perspective, according to market experts.

In terms of the Bank of England's future actions, analysts anticipate that interest rates will remain unchanged at least until September, reflecting the relatively higher inflation level in the UK.

They predict the potential for the GBP/USD exchange rate to revert to 1.2500 in a three-month perspective. However, they caution that, as the Fed's interest rate cut cycle progresses in the second half of the year, the exchange rate may rise to 1.3000.

gbpusd daily chart, forex analysis
GBP/USD daily chart, MetaTrader, 02.02.2024



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