Technical Bias: Bearish
- GBPUSD falls to nearly 5-year lows as BOE votes unanimously to keep rates at record lows.
- BOE minutes show growing concerns about a rising British pound and its impact on inflation.
The British pound declined sharply on Wednesday, falling to nearly five-year lows following a unanimous decision by the Bank of England to keep interest rates at a record low.
The GBPUSD bottomed out at 1.4630. It would subsequently consolidate at 1.4663, declining more than half a percent. The daily chart indicates a bearish trend, with the next support target situated at 1.4650. On the upside, initial resistance is likely to be found at 1.4823.
The pound slipped after the Bank of England’s Monetary Policy Committee voted 9-0 in favour of keeping interest rates at a record low of 0.5 percent and the size of the asset purchase facility at £375 billion, according to the minutes of the March policy meetings.
Bank officials expressed concerns about the role of the British pound in keeping inflation levels low. Bank Governor Mark Carney said the continued strength of the UK economy could boost sterling against a basket of trade peers’ currencies.
The sterling effective exchange rate index (ERI) had appreciated by around 2.5 percent during the month, reaching its highest level in more than six years, the minutes said. Most of the gains reflected an appreciation of the pound against the euro.
The risk of a stronger pound complicated deliberations about when to begin increasing interest rates. With annual inflation at just 0.3 percent in January, Bank officials are likely to play it safe for the rest of the year, as the global economy copes with plunging energy prices. The BOE says annual inflation could turn negative by the spring before rebounding in the latter half of the year.
“There was a risk that divergent monetary policy trends, as well as stronger prospects for growth in the U.K. than in the euro area, might continue to put upward pressure on the sterling exchange rate,” read the minutes of the March policy meetings. “This had the potential to prolong the period for which inflation would remain below the target and exacerbate the risk that lower expectations of inflation might become more persistent.”