The pound continues to decline, despite the Bank of England raising interest rates yesterday. Today, the GBP/USD pair is trading around 1.3424, well below its evening highs.

The decision itself was more hawkish than expected. The interest rate was raised to 4.00%, with all nine members of the Monetary Policy Committee voting in favor. The market had expected seven votes in favor, while only three members had supported a rate hike in September. The number of votes in favor increased from three to nine in less than two months, representing a significant shift within the committee. However, the pound did not appreciate in response to this news. The rate hike had been anticipated, while the dollar received support from strong US economic data at the same time.

The most important comments came from Bank of England Governor Andrew Bailey. He indicated that the tightening cycle might not be over and that another rate hike was more likely than not. However, there is one condition: this would only be possible if energy prices returned to their previous levels.

This is where the main problem for the pound lies. Oil prices are moving in the opposite direction. Brent crude has fallen to approximately $93.60 after reaching nearly $118 at the end of October. Over the past few days, its price has declined by almost $10 as the market anticipates an imminent end to the war with Iran. High oil prices were precisely what kept inflation elevated and gave the Bank of England grounds to consider further rate increases.

The market understands this and currently assigns a 50% probability to another rate hike in December. This explains why Bailey's hawkish comments failed to support the pound.

An interesting situation has emerged: the pound currently depends less on the Bank of England and more on oil prices. As long as oil continues to decline, the argument in favor of another rate hike becomes weaker with each trading session. Bailey himself acknowledged that much of the inflation surge has already been priced in. This means that lower oil prices may provide less relief than initially expected. However, the currency market focuses less on the precise figures and more on the overall direction, which currently remains unfavorable for the pound.

No support from UK economic data should be expected today. The Lloyds House Price Index will be released, with growth expected to be almost zero and some estimates even pointing to a decline. This would indicate a sluggish housing market under pressure from high borrowing costs.

Huw Pill will then deliver a speech. Back in July, he was among the three policymakers who voted for immediate monetary tightening, alongside Megan Greene and Catherine Mann. His hawkish stance has been well established and is already reflected in market prices, so no new market impetus is expected from his comments.

Therefore, the US labor market report remains the main market focus. This report will be discussed in detail in the forecast for the second half of the day.

Momentum

The price is currently trading within a range, with 10 points separating it from the upward breakout level of 1.3434 and 16 points from the downward breakout level of 1.3408.

The 1.3434 level is important for an upward move. If the pound consolidates firmly above it, the next targets will be 1.3460 and then 1.3481. Such a move is possible if the US economic report is weaker than expected or oil prices rise sharply. However, as oil prices continue to decline, this scenario appears less likely.

For a downward move, attention is focused on 1.3408. A downward breakout would open the way toward 1.3379 and 1.3355. This is considered the primary scenario. The dollar is supported by US economic data and the Federal Reserve, while the argument in favor of another Bank of England rate hike is becoming weaker.

Mean Reversion

The upper reference level is 1.3445, while the lower level is 1.3409. The upper level is 11 points above the breakout level of 1.3434, meaning that price could reach it quickly following an upward breakout. If the price touches 1.3445 and then moves back down, this would indicate a reversal rather than a continuation of the upward movement.

The lower level of 1.3409 is only 1 point above 1.3408. Because these levels are so close, it is impossible to distinguish a genuine breakout from a false breakout based on the first test alone. Therefore, it is better to avoid trading the initial reaction to the US labor market report and observe subsequent price action.