May 5, 2021 12:04:21

Will the Bank of England join the Bank of Canada in reducing its purchases of bonds, known as tapering? There is a range of opinions on the MPC meeting tomorrow on whether to taper now or later in the summer which means there are good two-way risks for sterling.

The UK has not had a solid jobs recovery with most of the losses seen since the pandemic still intact and covered up by the furlough scheme. We saw decent growth in the fourth quarter but the UK economy contracted again in the first three months of this year. So, spare capacity remains with inflation stuck at just over half the MPC’s 2% target. On the positive side, the bank is set to upgrade growth forecasts because of vaccine progress, a faster easing of restrictions and near-term stimulus from the recent budget.

If we get a taper, then GBP should move higher, though Governor Bailey may temper talk of any more hawkish action. Conversely, some sort of phrasing like “if the outlook were to evolve as we expect then it’s feasible we will look to reduce stimulus at a later date” will see GBP sell off. Indeed, it seems a disappointment on the taper front has the propensity to see a larger move on the downside.

GBP/USD rangebound for now…

Not much has changed from when we looked at cable at the start of the week. We have been trapped in a neutral sideways range for the past two months with first resistance at 1.3933 ahead of the March highs at 1.4001. If the bulls get their way and see a taper and positive outlook from Governor Bailey, prices can break in line with the long-term uptrend and push on to 1.4238 fairly quickly. 2018 highs come in above here just above 1.43 which is also the 50% retracement of the 2014/2020 bear trend for longer-term traders. Support moves to this week’s low at 1.3802 and the 100-day SMA just below which is a good place for stops on any bullish bets. The range lows reside at 1.3667/70.

EUR/GBP rolling over

Selling in EUR/USD has spilled over into EUR/GBP in recent sessions, though 1.20 remains a key pivot for the single currency. The euro April comeback ended the downtrend in EUR/GBP but multiple attempts to take out 0.87 have failed so far. The pair has now fallen through the 23.6% Fib level of this year’s move with next support at the 50-day SMA around 0.8615 and the mid-April lows at 0.8588. Any taper move by the BoE will see prices move swiftly lower towards here, while disappointment will see EUR/GBP bulls try to conquer that strong resistance at 0.87 once more.