Technicals Support Bank of England Interest Rate Policy (Feb ’18)

“… [T]hat it will be necessary to raise interest rates… to a limited degree… in a gradual process… but somewhat earlier and to a somewhat greater extent than we had thought in November…”

The words of Bank of England Governor Mark Carney on 8^th February 2018.

Following his statement, there was a broad bounce in GBP, as traders were caught by surprise.

(We maintain a positive stance to GBPUSD in the long term – report here.)

However, looking at the long-term Short Sterling Continuation charts, one can see why the UK Central Bank has adopted a more hawkish tone.

Broad Range Trading Following Financial Crisis

Following the 2007-2008 Financial Crisis, Short Sterling settled into a broad range, supported by the 98.83 year low of November 2011.

The bounce from here found resistance at 99.54, (year highs from October 2012-March 2013), before a second bounce found fresh resistance at the 99.74 year high of July 2017.

This prolonged consolidation phase gave way to stable interest rates.

However, we are now seeing signs that this multi-year consolidation phase could be coming to an end.

Prices are falling steadily from 99.74, and both momentum studies and our proprietary Tension Indicator are signalling increased downside risks into the coming quarters.

We believe this technical weakness, and potential acceleration lower, is one factor which has led to Governor Carney’s more hawkish stance.

Next significant support is at the 99.33 year low of June 2014.

Whilst prices remain above here, further consolidation is highlighted, and the BoE could respond with a single interest rate rise.

However, a close beneath 99.33 would add fresh downside pressure to price action. This would lead to an acceleration lower towards the psychological 99.00 support level.

All under control

It would seem that the UK Central Bank is anticipating a price break into this 99.00/33 area, and the possibility that interest rates will likely be approaching 1% – if they are not already there.

To stay ahead of price action, and prevent the Bank from being caught out by any swift falls, Governor Carney has used the 8^th February press conference to get ahead of the story.

So far, all is under control.

However, looking still further out, if critical support at the 98.83 year low of November 2011 is broken, then the Bank will find itself very busy.

This will confirm a significant multi-year top in place at the 99.74 high of 2017.

The subsequent fall will likely be swift, as prices fall towards the 98.17, (23.6%) Fibonacci retracement of the 2007-2017 rally.

Could this push interest rates towards 1.75%?

Conclusion

In the meantime, whilst Short Sterling trades above 99.00, price action will remain orderly, and it is “business as usual” at Old Threadneedle Street.

Only if prices show risks of breaking below 99.00, and potentially 98.83, will the interest rate space really heat up.