British Pound (GBP) Price Outlook: GBP/USD Gains Unlikely Ahead of BoE Rate Decision

GBP/USD price, news and analysis:

• GBP/USD is trading broadly sideways, just under 1.38, ahead of the November meeting of the Bank of England’s rate-setting monetary policy committee next week.
• Expectations of an announcement of a UK rate increase next Thursday have been waning but a rise is still substantially priced in, suggesting that GBP has limited upside potential and that the scope for disappointment among the bulls is high.

GBP/USD upside limited

GBP/USD will continue to be buffeted by interest rate expectations ahead of next week’s announcement on rates by the Bank of England’s monetary policy committee. Currently, the markets suggest a 62% chance that the MPC will hike rates by 25 basis points and that means there’s scope for GBP to ease back if rates are left unchanged.

The BoE’s new chief economist Huw Pill said last week that the MPC is “finely balanced” over whether to raise rates in November but his comments were seen as hawkish as he also said inflation in the UK could rise above 5% by early next year. That has added to the underlying strength of the Pound and also to the scope for the bulls to be disappointed.

GBP/USD Price Chart, One-Hour Timeframe (October 18 – 26, 2021)

Source: IG (You can click on it for a larger image)

Bullish further ahead

Note, though, that the markets are pricing in an 87% chance of an increase by December, with market prices suggesting a roughly 50/50 chance that the target rate will have risen by either 0.25 or 0.50 percentage points by then.

UK Budget approaching

In the meantime, this Wednesday sees the UK Budget and Spending Review. This is a major political event in the UK but rarely moves the markets, although Sterling traders need to keep a wary eye on it. Leaks have led to predictions that Chancellor of the Exchequer Rishi Sunak will include support for businesses and individuals, including a hike in the minimum wage and more money for the National Health Service. At the margin, the minimum wage rise could be seen as inflationary – and therefore GBP positive – but will not budge the markets much.

Sentiment data positive

As for sentiment, there is currently a mildly bullish message from the IG client positioning data. The retail trader numbers show 47.25% of GBP/USD traders are net-long, with the ratio of traders short to long at 1.12 to 1. The number of traders net-long is 3.74% higher than yesterday and 0.37% higher than last week, while the number of traders net-short is 10.81% higher than yesterday and 1.40% higher than last week.

Here at DailyFX, we typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may rise.Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a GBP/USD-bullish contrarian trading bias.

— Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex