GBP/USD bulls stay on course ahead of the BoE event

• GBP/USD bulls in good stead for a run towards the 1.3660's.
• The BoE is now the main focus ahead of Friday's US NFP.

At 1.3570, GBP/USD is around 0.40% higher on the day as it tracks down the start of the New York sessions highs of 1.3587 again during midday trade. Sterling is climbing on Wednesday for the fourth session in a row, reaching a 1-1/2-week high against the dollar.

Trader's expectations that the Bank of England will raise interest rates on Thursday, a disappointment in US jobs data, a softer US dollar and rebounding US stocks, is supporting cable higher. 

Bearish prelude for NFP

The US dollar depreciated to a low of 95.806 at the start of the day as measured by the DXY index as what might be regarded as a prelude to Friday's January Nonfarm Payrolls employment report disappointed.  ADP private payrolls, which showed a 301,000 drop, was missing an estimate of 207k.

Also, the January decline followed a downwardly revised 776,000 increase in December, compared with the 807,000 gain initially reported. By sector, goods-producing jobs fell by 27,000, while service-providing jobs plunged by 274,000, with leisure and hospitality jobs down 154,000.

Meanwhile, domestic data for sterling since December has shown that the economy was in much better shape than expected heading into Omicron, and high inflation is lifting inflation expectations. Encouragingly for cable bulls this week, a survey has shown British manufacturing output grew at the fastest pace in six months in January. This is supporting the view that the British economy is still handsomely rebounding from the COVID-19 recession.

Moving into the key event, the BoE, which was among the first off the blocks among its developed market peers to raise interest rates in December, the money markets are now expecting a total of 125 bps in rate hikes from the central bank this year.

This has been priced into the pound, so traders will be keen to see if policymakers strike a more hawkish tone to curb inflation in Thursday's meeting. 

Reuters reported on Wednesday that most economists polled by the news agency believe the BoE will also signal its approach to start unwinding its 895 billion pound ($1.2 trillion) quantitative easing programme.

''Investors have now fully priced a 25-basis-point rise in the BoE's main interest rate to 0.50% on Feb. 3 and economists polled by Reuters also expect that outcome from the meeting.''

A bearish outlook for GBP on BoE

Based on their base case scenario for Thursday's BoE meeting, analysts at TD Securities said, ''we think the profile skews more negatively for GBP on the day, especially as positioning looks relatively long. That said, external drivers, like risk and the USD, feature prominently in the price action.''

Their base case view, published on Wednesday in the same notes is as follows:

''The MPC hikes Bank Rate, but echoing its recent messaging, offers few hints at future rate hikes beyond the big-picture acknowledgement that rates need to continue rising. The yield curve is implicitly backed by the MPC over the medium-term with 2024 inflation likely to be revised just a touch higher (though still under 2%).''

GBP vulnerable to a tax hike

Meanwhile, at the start of the week press reports indicated that the planned April increase in UK National Insurance Tax will go ahead despite calls from some Tory MPs for this to be reviewed in light of the rise in the cost of living. 

''On the assumption that the government does proceed with its tax hike in April, we see the risk that the market will unwind some of its assumptions on BoE rates and this could leave the pound vulnerable in the spring and early summer,'' analysts at Rabobank argued. '' Given our view that the USD will be buoyed as Fed tightening commences, we see a risk that cable could dip below the 1.30 level in the middle of the year.''

As for politics, currency markets have simply ignored the latest developments of the political crisis in Britain over lockdown parties at Downing Street. This is despite the fact that six Conservative members of parliament now publicly saying they are seeking a vote of confidence on Prime Minister Boris Johnson's leadership on Wednesday.

GBP/USD technical analysis

The price has burst through what might have been expected to be a firmer resistance on the 4-hour charts near 1.3525. A break of 1.3580 could set the stage for a rally through to the 1.3660s to mitigate an old imbalance of price between here and there.