GBP losing ground

The Bank of England is set to keep policy rates and asset purchases unchanged today This will offer little comfort to GBP following its recent falls from its highs around 1.6669 versus USD. GBP has also lost ground against the EUR but this is unlikely to persist. GPB was not helped by the lower than expected purchasing managers index (PMI) manufacturing survey in January although confidence in the manufacturing sector remains at a high level.

In the wake of a quicker decline in the unemployment rate than expected (the unemployment rate fell to 7.1% in the three months through November) the BoE is faced with the risk that their current forward guidance proves inappropriate. The BoE has set a rate of 7% at which it would consider raising policy rates and this could be hit very soon. Given that the BoE is highly unlikely to want to hike policy rates any time soon Governor Carney will need to allay concerns over the prospects of higher policy rates by altering its forward guidance.

Manufacturing and industrial production data tomorrow will give further direction, with healthy gains expected to provide some support to GBP. However, given that the policy meeting today is likely to prove to be a non event the Quarterly Inflation Report next week will quickly move into focus.

GBP/USD appears to be gravitating towards its 100 day moving average around 1.6252 but major technical support is seen around 1.6220.

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