GBPUSD to 1.38?

GBPUSD to 1.38?

GBPUSD to 1.38?

The best performing currency this past week was sterling, which hit a 15 month high. More gains are possible as there is always a period of adjustment when investors learn that their expectations are misaligned with the central bank’s views. That’s exactly what happened with the Bank of England this past week. After lowering their GDP and wage growth forecasts in August, they sent rate hike odds below 20% but with their guidance on Thursday, the chance of tightening before the end of the year shot up to 66%. The Bank of England voted 7-2 to leave interest rates unchanged and what got the market really excited was their comment that “a majority of monetary policy members see scope for stimulus reduction in the coming months.” This tells us the BoE is preparing to join the ECB and the Fed in removing stimulus. Although third quarter growth is expected to be subdued, inflation has been hot with annualized CPI growth hitting 2.9% in the month of August. Rather than downplay the increase, the BoE said they see inflation exceeding 3% next month, well beyond their 2% target. At the same time, “eroding slack reduces their tolerance for faster inflation,” which is why the central bank believes the market is underpricing the chance of a rate hike. The tone of the BoE statement was unambiguously hawkish and BoE Governor Carney confirmed that he is among the majority on the MPC who see the need to change stimulus. As such, we expect further gains in GBP, helped by the upcoming retail sales. It may not be long before we see GBP/USD at 1.38 with even stronger gains for GBP versus AUD and NZD.

Technically, the next major resistance level for GBPUSD will be Feb 2016 low near 1.3850 while support sits at the 100-week SMA near 1.3385.

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