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After trading as high as 1.3338, GBP/USD dropped more than 200 pips as sellers returned. The reversal in GBP on Tuesday was driven by misplaced expectations – economists are looking for a 25bp rate cut, investors felt they were wrong and bid up sterling on the hope that GBP will spike if the BoE left rates unchanged. Today, they resumed selling because they realized that regardless of whether its tomorrow or August, rates are coming down and even if the BoE passes on a move Thursday, they’ll prepare everyone for easing later this year. Unless Prime Minister Theresa May decides not to invoke Article 50, the outlook for the U.K. economy and sterling is grim. As for the Bank of England, they have plenty to worry about. Economic data is expected to worsen in the coming months with business and consumer investment expected to freeze up. The Bank of England is trying to preempt the slowdown and avoid recession by being proactive but they still need more information before pulling the trigger. So far stocks have held up well and the decline in sterling along with the drop in Gilt yields is positive for the economy, which means they can wait until their economic forecasts are updated. Major policy changes tend to coincide with the release of the BoE Quarterly Inflation Report (the report is generally used to telegraph the changes) and the next report will be released in less than a month. If sterling rises because the Bank of England left interest rates unchanged and some part of the market was disappointed, the rally should be sold. If it falls because of Carney’s dovishness, traders may find it fruitful to join the move quickly.
Technically, if GBPUSD drops below the June 27th low of 1.3120, it is likely to be headed to 1.3000. If it rises back above 1.3200 it is headed to 1.33 and possibly even 1.3350.