GBP/USD plunges to its lowest level since July 2020 after BoE’s gloomy economic outlook

• GBP/USD witnessed aggressive selling on Thursday in reaction to the BoE’s dovish outlook.
• Resurgent USD demand aggravated the bearish pressure and also contributed to the slide.
• Acceptance below the 1.2400 mark would now be seen as a fresh trigger for bearish traders.

The GBP/USD pair weakened further below the 1.2400 mark and touched its lowest level since July 2020 in reaction to the Bank of England's dovish outlook.

As was widely anticipated, the UK central bank lifted its key interest rate for the fourth time in the current tightening cycle to curb inflation. The vote distribution indicated that three MPC members were in favour of raising interest rates by 50 bps. Moreover, the BoE, in the accompanying policy statement, noted that some degree of further tightening in monetary may still be appropriate in the coming months.

That said, two MPC members judged rate guidance as inappropriate considering that risks to growth and inflation are more balanced. Adding to this, the BoE warned about a sharp slowdown and is forecasting the UK economy to contract by 0.25% in 2023. A divided MPC, along with downside growth risks, suggests that the rate hike cycle could be nearing a pause, which, in turn, prompted aggressive selling around the British pound.

In the post-meeting press conference, BoE Governor Andrew Bailey said that the MPC doesn't agree with people who think that they should raise interest rates a lot more. On the other hand, the US dollar made a solid comeback amid expectations that the Fed would hike interest rates by 50 bps at the next four policy meetings. This aggravated the bearish pressure surrounding the GBP/USD pair and contributed to the decline.

The sharp intraday decline took along some trading stops placed near the previous weekly low, around mid-1.2400s touched on Wednesday. The subsequent fall, however, showed some resilience below the 1.2400 round-figure mark. This makes it prudent to wait for sustained weakness below the said handle before positioning for any further depreciating move.

Technical levels to watch