Home GBP/USD Outlook: Contracting Economy Raises Probability of Dovish BoE

GBP/USD Outlook: Contracting Economy Raises Probability of Dovish BoE

  • The pound has had its biggest monthly gain in over a year.
  • The BoE is expected to deliver a 75bps hike this week.
  • The BoE might surprise markets with a smaller hike as the British economy faces a looming recession.

Today’s GBP/USD outlook is bearish as the British economy heads for recession. Despite falling on Monday, the pound was still on track to post its biggest monthly gain in more than a year as the recent political turmoil in Britain finally seemed to be subsiding.

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The pound gained 3.5% in October, the most in a single month since July 2020, when it increased by 5.5%, after hitting a historic low of $1.0327 versus the dollar in late September. When it meets later this week, the Bank of England is expected to increase interest rates by 75 basis points. The British economy is contracting. However, rising energy prices and a weak currency have fueled a cost-of-living crisis that has driven consumer inflation into double digits.

In light of this, analysts claimed that the markets may be overestimating the BoE’s potential actions and that there was more room for a dovish surprise than anticipated.

“The market firmly prices 75 bp, but we think the risk of a softer 50 bp is under-priced as the BoE prepares for the coming recession,” ING strategist Chris Turner said.

Money markets indicate that traders assign a nearly 100% possibility of a three-quarter point rate increase from the BoE. It is anticipated that UK interest rates will peak at roughly 4.87% in September of next year, up from their present level of 2.25%.

GBP/USD key event today

Investors are expecting the manufacturing PMI report from the UK. They are also awaiting the ISM manufacturing PMI and JOLTs job openings reports from the US.

GBP/USD technical outlook: Bears leading after a double top

GBP/USD outlook

Looking at the 4-hour chart, we see the price trading below the 30-SMA and the RSI below 50, showing bears are in charge. The price was in a bullish trend when it got to the 1.1619 resistance level and stopped. A second attempt to push above this level failed, making a double-top.

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Bears returned with enough strength to break below the 30-SMA, signaling a shift in sentiment to bearish. If bears can keep the price below the SMA, it might retest support at 1.1269.

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Saqib Iqbal

Saqib Iqbal

Saqib Iqbal is a market analyst, prop fund trader and mentor, serving the industry with his analysis and educational content since 2011. The author has great exposure to different financial markets and institutions. He's well-known for his day trading reviews and multiple timeframe analysis.