British Pound Forecast: BoE Talks About End Game, EUR/GBP Drops To Yearly Lows

BoE Summary: The BoE's update on its exit sequencing was the most notable takeaway. It lowered its threshold for unwinding its balance sheet by 0.5% to 1.5%, and the BoE did the same with its Bank Rate threshold.

British Pound Forecast: BoE Talks About End Game, EUR/GBP Drops To Yearly Lows

Market participants also raised concerns about the timing of rate increases after the BoE acknowledged that if the economy grows as expected, moderate tightening may be necessary. Short sterling futures signalling the Bank Ratio at 0.5% by December 2022.

The view of normalising policy is quite different from the ECB's. Therefore, the Pound can maintain its upside against the Euro. With EUR/GBP falling below the psychological 0.8500 handle the cross is pushing on the YTD low of 0.8470. Any bounce will likely to be sold into. The back end of Q1 is different. EUR/GBP does not appear to be oversold on a break below 0.8500, as it was previously. It is important to evaluate the cross at 0.8500. Failure to hold could lead to weak shorts on a breach squeeze of 0.8500. This would prompt a reprieve for EUR/GBP. However, the upside potential of 0.8500 can be added credence to the downside.

GBP/USD: The pair closed the week exactly where it started, and then fell back below 1.3900. The NFP report has made the Jackson Hole Symposium an important meeting to announce the details of an eventual QE taper. It would also mark the anniversary of the average inflation targeting announcement. The USD could maintain a bid going into JH, thus limiting upside in Cable, despite US yields reaching a temporary bottom. Support is at 1.3870, 1.3850 and the topside, where the key pivot for bulls is at 1.4000.

What to Watch Next Week

The UK calendar will be relatively quiet next week. Only the Q2 GDP report for the UK will be published. The expected quarterly reading of 4.8% is expected, which means that GDP will be less than 3 percent away from pre-Covid levels. This data is unlikely to change the BoE's future thinking, so I don't think this will be a significant mover for the currency. The BoE continues to project that GDP will be 7.25% in 2021. The USD side of the equation could be the most important determinant, with US CPI being the main focus on the economic calendar next Monday.

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