The British pound on Wednesday had its worst day since May, plunging as low as $1.3300 against the U.S. dollar. This decline occurs as investors prepare for the Bank of England’s (BoE) crucial meeting on Thursday. After inflation undershot again, and economic signals continue to flash red for a recession. Consequently, the pound is feeling heavy pressure as traders bet on the likelihood of imminent interest rate cuts.
In the recent analysis, we demonstrated that the British pound’s signal line has exited the histogram zone. Right now it is approaching negative territory, suggesting it may drop to new lows. Further, the signal line has now moved below the 50 level and is solidly trending down towards the 20 level. This technical analysis only strengthens worries about the pound’s fragility as it nears a critical decision from the BoE.
Given all these factors, analysts are forecasting a technical correction rebound for the British pound back toward 1.3370. This abrupt rebound is likely to be short-lived. Once the correction ends, analysts expect a return to the main downtrend, with targets at 1.3240. There is potential for an extension towards 1.3175, paving the way for the currency to remain on its weakening path.
Disappointing inflation data released earlier this week may be contributing to this trend. As of November, the annual Consumer Prices Index (CPI) inflation rate was down to 3.2%. This drop was below projections which called for a rise to 3.5%. The figure came in under the central bank’s own forecast of 3.4%. This drop raises market expectations that the Bank of England is almost certain to deliver interest rate cuts at next week’s meeting.
Recent labour market data should give us pause, as unemployment has jumped to its highest level since 2021. At the same time, wage growth has eased considerably, though not to the degree that most economists had feared. A combination of these elements creates a lurching economic landscape. Last week’s Gross Domestic Product (GDP) data showing a contraction for the second month in a row in October, continuing the trend, only exacerbated that.
Of course, money markets have shifted their expectations about the likely monetary policy. They’re still expecting a total of 66 basis points of easing by the end of 2026. This shift marks a new level of concern about the UK’s economic wellbeing. It reinforces the betting that the Bank of England will soon be cutting interest rates.
On Thursday, it won’t just be the Bank of England’s decision that the world is watching. It would be tremendously damaging to the British pound and the UK economy overall. Analysts suggest that if the central bank opts to lower interest rates, it could exacerbate the current downtrend in the pound.