GBP/USD Headed to 1.38?

GBP/USD Headed to 1.38?

Chart Of The Day

GBP/USD Headed to 1.38?

It should also be a busy week for sterling with a Bank of England monetary policy announcement, retail sales, consumer prices and labor market reports scheduled for release. After numerous tests, GBP/USD rejected 1.40 and appears on its way back down to 1.3800. Whether this key level is broken or not will be determined by the BoE and FOMC rate decisions. American policymakers meet before the Brits and they are widely expected to raise interest rates for the first time this year. Yet what’s important is not the rate hike but their guidance on future tightening. If the dot plot shows policymakers leaning towards 3 instead of 4 hikes, the dollar should fall, driving GBP/USD higher. If it shows 4 instead of 3, GBP/USD could fall aggressively. As for the BoE, at the last meeting sterling shot higher after the central bank raised their 2018 and 2019 GDP forecasts adding rates may need to rise faster and earlier than previously expected. This hawkishness caught the market by complete surprise. Although here’s been more weakness than strength in the U.K. economy since the last meeting (manufacturing activity slowed, retail sales growth barely turned positive) and consumer price pressures eased, its unlikely that the central bank will walk back their positive outlook so quickly. This is not a monetary policy announcement that is accompanied by a press conference by Mark Carney (like the last one) so the statement is likely to be unchanged.

Technically, after a series of lower highs and lower lows, GBP/USD has broken below the 20 and 50-day SMA. This move is not only bearish but signals a potential move below 1.3800.

GBPUSD to 1.38?

GBPUSD to 1.38?

Chart Of The Day

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.