Currency Pair of the Week: GBP/USD

Central bankers in the UK are seemingly beginning to believe that inflation may not be as transitory as they had previously thought

Inflation is all the rage these days.  Is it transitory or isn’t it? If so, how much of it is transitory?  Over the course of the last week and a half, central bankers in the UK are seemingly beginning to believe that inflation may not be as transitory as they had previously thought.  It seems like just yesterday that Baily was telling banks to prepare for negative rates (it was at the February 2021 meeting).  However, last week, the Bank of England’s Saunders said that investors are correct to bring forward their expectation for timing of BOE’s first post-Covid rate hike. 

What is inflation?

In addition, BOE Governor Baily said that there could be a potentially “very damaging” period of inflation unless policy makers take action.   Following that up over the weekend, he warned that inflation in the UK means that the central bank will “have to act” to curb pressures. (Increased energy prices!?!?)  Markets are pricing in a 25bps hike at November’s meeting and up to 1% within a year!  Something else to keep an eye on: Coronavirus cases in the UK have crossed 45,000 per day, the largest increase since July 20th. 

 

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The US very much seems to be on the eve of announcing a taper of bond purchases at its next meeting on November 3rd.  With the US Dollar index trading near 1-year highs, US Dollar traders have been pricing in US Fed hawkishness since May, with price the DXY rising from 89.54 on May 25th to 94.56 on October 12th. 

At the last FOMC meeting, Fed Chairman Powell said that he sees tapering ending by mid-2022 and that inflation and employment goals are all but met in his opinion. And although September’s NFP print was only +194,000 vs +500,000 expected, the August print was revised much higher, making the September print more like +325,000.  In addition, last week’s initial jobless claims print was 293,000, marking the first time the print has fallen under 300,000 since the pandemic began in March 2020! 

GBP/USD had been moving lower since June 1st, mainly because the US Dollar had been strengthening.  Beginning July 21st, the pair formed a symmetrical triangle , and broke lower as price neared the apex on September 29th , near 1.3610.  GBP/USD spiked down to horizontal support and the 50% retracement from the September 23rd lows to the June 1st highs, near 1.3450.  Price has since recovered and moved back inside the triangle at the 50-Day Moving Average near 1.3711.

gbpusd daily ci

Source: Tradingview, Stone X

On a 240-minute timeframe, after moving higher from the recent low on September 29th, GBP/USD retraced to the 61.8% Fibonacci level from the September 14th highs to the September 29th lows, as well as horizontal resistance, between 1.3721and 1.3764.  Current resistance is at the October 15th highs of 1.2773 and then the downward sloping trendline of the triangle and horizontal resistance, near 1.3790.  The 200-Day Moving average is above at 1.3242 (see daily).  Support is at the bottom, upward sloping trendline of the triangle near 1.3677, and then horizontal support at 1.3569 and 1.3532.

gbpusd 240 ci

Source: Tradingview, Stone X

If BOE officials continue remain hawkish and signal a rate hike at the November 4th meeting, GBP/USD bulls will be looking to buy the pair and run it towards the 1.3913 recent highs. However, there is always the possibly that we could see a “buy the rumor, sell the fact” after the BOE meeting. Watch the statement and comments to see how aggressive the MPC is regarding their next rate hike!

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