Home Stocks Currency Pair of the Week: GBP/USD

Currency Pair of the Week: GBP/USD

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The BOE meets this week to discuss interest rate policy.  The central bank is widely expected to hike rates by 25bps from 1% to 1.25%.  The MPC is very concerned about how the risks of inflation and higher interest rates will affect household incomes.  At the last meeting, the MPC said they see inflation peaking slightly over 10% YoY in Q4. The last inflation report on May 15th showed that inflation for April was at 9% YoY vs 7% YoY in March! The next inflation reading isn’t until after this week’s BOE meeting.  In addition, on Monday the UK released GDP data for April.  The print was -0.3% MoM vs -0.1% MoM in March.  Also, Manufacturing Production for April was +0.5% MoM vs +1.9% MoM in March, while  Industrial Production was -0.6% MoM vs -0.2% MoM in April.  Clearly the BOE is justified in its concern for  slowing growth.  On Tuesday, the UK will release the Claimant Count Change for May.  Expectations are for claims to drop by 49,000 vs -56,900 in April.  In addition to the BOE meeting this week,  the UK will draw up legislation on the Northern Ireland Protocol.  The new law may be setting up to block European judges from having a final say on Northern Ireland disputes, according to the Telegraph.  If passed, the new law could draw ire from the EU, and it may impose restrictions or fines from the UK.

The Fed’s Federal Open Market Committee is also set to meet this week.  The committee is widely expected to increase interest rates by 50bps from 1% to 1.5%. They are also expected to raise rates by another 50bps at the July meeting.  The latest CPI reading for May was 8.6%, the highest since December 1981.  As a result, there are some calls for the committee to raise rates by 75bps at the meeting this week.  Could Powell and gang surprise the markets?  Payrolls have been robust, with the latest Unemployment Rate at 3.6%.  On May 18th, Fed Chairman Powell said that getting inflation down may come at the expense of the 3.6% Unemployment Rate.  Could this be the time the Committee takes its shot at the labor market and increases rates by 75bps?  The US will also release Retail Sales this week.  Expectations are for an increase of +0.2% MoM vs +0.9% MoM in April.  Markets will get a chance to see if inflation has caused the American consumer to take pause with their spending habits.

On a weekly timeframe, GBP/USD has taken out the recent low of 1.2155 from the week of May 9th and has traded down to its lowest level since May 2020.  If GBP/USD trades below support at 1.2075, it has room to run towards the lows from March 2020 at 1.1410!

Source: Tradingview, Stone X

On a daily timeframe the GBP/USD recently retraced to the 50% level from the highs of April 21st to the lows of May 13th, near 1.2628.  In doing so, price formed an AB=CD pattern, where the distance from A to B should be the same distance of C to D.  That would target 1.1777.  However, in order to get there, price would first have to pass through the recently mentioned May 2018 low at 1.2075, then the 78.6% Fibonacci retracement from the lows of March 2020 to the highs of May 2021 near 1.2018.  Below there, support is at the psychological round number of 1.2000.  If price does reverse, horizontal resistance sits above at 1.2430, then 50 Day Moving Average at 1.2628.  Just above there is the highs from May 27th at 1.2667.

Source: Tradingview, Stone X

With both the FOMC and the BOE meeting this week, GBP/USD could be in for some volatility.  The pair has come a long way over the last month and the AB=CD pattern targets 1.1777.  Could rate hikes or comments from board members push the pair lower?  Or with 9% inflation, will the BOE be more hawkish than the FOMC?  This would push the pair higher.  Be on alert for quick, sudden changes in the direction of GBP/USD later this week!

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