GBP/USD Bounces Off Record Low as Speculators Bet on BoE Emergency Rate Hike

The British Pound closed lower against the U.S. Dollar on Monday after touching a record low during the Asian session. The loss could have been worse if not for a solid intraday technical bounce that brought the currency back above the session’s mid-point.

On Monday, the GBP/USD settled at 1.0686, down 0.0170 or -1.59%. The Invesco CurrencyShares British Pound Sterling Trust ETF (FXB) finished at $102.79, down $1.69 or -1.62%.

The Sterling dropped to an all-time low as investors worried Britain’s new economic plan will hurt the country’s finances, while the Bank of England said it was watching financial markets “very closely” following sharp moves in asset prices.

Traders are reacting negatively to the unveiling of new Finance Minister Kwasi Kwarteng’s historic tax cuts, funded by the biggest increase in borrowing since 1972. British government bond prices collapsed. One of the reason upsetting investors is that the government is going to be funding the tax cuts as interest rates are rising, which is making to make the plan very expensive.

BoE Might Take Emergency Action to Shore Up the British Pound

The pound largely rebounded from its overnight losses, as traders speculated the BoE might take emergency action to stem the currency’s fall, but retreated a second time after BoE Governor Andrew Bailey said the central bank was watching the markets, but did not signal any immediate action.

“There is a good chance that the BoE will now be forced to hike rates aggressively in the coming November meeting if an emergency intervention isn’t made before,” Fiona Cincotta, senior financial markets analyst at City Index said.

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart. A trade through 1.0349 will signal a resumption of the downtrend. A move through 1.1738 will change the main trend to up.

The minor range is 1.0349 to 1.0930. It pivot is 1.0640.

The short-term range is 1.1738 to 1.0349. Its retracement zone at 1.1043 to 1.1207 is the next major upside target and potential resistance zone.

Daily Swing Chart Technical Forecast

Trader reaction to the minor pivot at 1.0640 is likely to determine the direction of the GBP/USD early Tuesday.

Bullish Scenario

A sustained move over 1.0640 will indicate the presence of buyers. If this is able to generate enough upside momentum the look for a possible near-term surge into the short-term 50% level at 1.1043. Since the main trend is down, look for sellers on the first test of this level. Overcoming it, however, could extend the rally into the short-term Fibonacci level at 1.1207.

Bearish Scenario

A sustained move under 1.0640 will signal the presence of sellers. If this creates enough downside momentum then look for a retest of 1.0349. Since this is a historical low, taking it out could trigger an acceleration to the downside.

Side Notes

Look for volatility as traders may continue to float the idea of an emergency rate hike by the Bank of England in order to slowdown the selling pressure.