The pound was propelled higher after the Monetary Policy Committee (MPC) of the BOE decided to increase its interest rate. This decision catalysed a long-expected trend reversal on the GBPUSD. Read more about the dollar's weakness from our comprehensive EURUSD analysis.
In a surprising move, the MPC of the Bank of England, chaired by Andrew Bailey, decided to lift its interest rate to 0.25 per cent and keep its asset purchase facility unchanged at 875 billion. This caused the pound to rally in the short term.
As can be seen on the 4H chart above, the GBPUSD had already started establishing a trend reversal before BOE's decision. The previous downtrend was terminated at the 38.2 per cent Fibonacci retracement level at 1.31676.
This also marked the completion of a major 1-5 impulse wave pattern, as postulated by the Elliott Wave Theory. The breakout above the descending channel was also catalysed by the dollar depreciation that resulted from FED's policy decision from yesterday.
Immediately following BOE's policy decision, the GBPUSD broke out above the major resistance-turned-support level at 1.32750, underpinned by the 100-day MA (in blue). The price action is currently headed towards the next major support at 1.34000, which was just crossed by the 200-day MA (in orange).
If the bullish sentiment persists, then the new uptrend is likely to head further up north towards the 23.6 per cent Fibonacci at 1.35820. However, it would first have to break the major resistance at 1.35000, whose strength is underscored by the 300-day MA (in purple).
The Monetary Policy Committee voted by a majority of 8-1 to increase #BankRate to 0.25% and by a majority of 9-0 to maintain the amount of quantitative easing at £895bn. https://t.co/8N5Szd2mD3 pic.twitter.com/b7rsd11fi8— Bank of England (@bankofengland) December 16, 2021
Eight members of the Committee voted in favour of the motion, with only one abstaining. The market forecasts were anticipating only two members to agree to such a hawkish decision at the present rate. Meanwhile, a uniform decision to maintain the asset purchase facility unchanged was also unexpected.
"The level of global GDP in 2021 Q4 is likely to be broadly in line with the November Report projection, but consumer price inflation in advanced economies has risen by more than expected. The Omicron variant poses downside risks to activity in early 2022, although the balance of its effects on demand and supply, and hence on medium-term global inflationary pressures, is unclear. Global cost pressures have remained strong."