The FOMC and the BOE both have meetings this week which could create volatility in GBP/USD!
For the Pound this week, it’s going to be all about the Bank of England meeting on Thursday. (See our complete BOE preview here). Last week, the UK released a string of data. The claimant count for August was much better than expected at -58,600 vs -7,800 in July. The employment data has been improving since February. Headline CPI for August was 3.2% YoY vs 2.9% expected and 2% in July. This was the highest reading since March 2012. However, consumers in the UK didn’t show up in August, as the headline print was -0.9% MoM vs +0.5% expected and -2.8% in July. In April, this reading was +9.2% and hasn’t returned to positive territory since. So, with this data in mind, will be BOE decide to taper this week? Not likely. With the furlough program terminating at the end of September, some most likely won’t be spending as much, creating an even worse retails sales print. At the very least, the BOE will want to see how the end of the furlough plays out in the economic data for October before they do anything. And although at the last meeting members split 4/4 as to whether the economy met minimum criteria for an increase in rates, any tapering would likely happen at the November meeting rather than this week’s meeting.
In the US, the story is a bit different. Not only is there a FOMC meeting, but markets may be starting to worry about the debt ceiling. Treasury Secretary Janet Yellen said that if not raised, the situation would precipitate into a financial crisis, cause a recession, and leave a US a “permanently weaker nation”. Yikes! However, in the near term is Wednesday’s Fed meeting. Will the FOMC formally tell the markets that tapering will begin? ( See our complete FOMC meeting preview here.) At the Jackson Hole Symposium, Powell noted that inflation goals have been met for tapering, however there was still much ground to cover in terms of employment goals. Since then, we’ve had the August Non-Farm Payrolls report. +235,000 jobs were created during August vs +750,000 expected and +1,053,000 in July! Will this be enough to cover “much ground”? At the July FOMC meeting, most Fed officials saw a rate hike by the end of 2022, will it be the same in the “dot plots” this week? Also, many officials that have spoken lately said they see tapering by the end of the year. Even the biggest dove of all, Jerome Powell, said he could see it by the end of the year. So, the question seems to be more one of timing. From recent statements, it seems tapering will begin by the end of the year. However, will it formally be announced at this meeting or at Novembers meeting?
On a daily timeframe, GBP/USD reached its highest level since February 2018 at 1.4210. The pair pulled back and retested those levels on June 1st, briefly spiking through to 1.4250 before retreating. Once price broke 1.3668 on July 16th, a double top formation was formed, however it was unable to hold below those levels as price bounced to the 61.8% Fibonacci retracement level from the June 1st highs to the July 20th lows, just below the psychological round number resistance number of 1.4000. Since then, GBP/USD had been oscillating around the 50- and 200-Day Moving Averages near 1.3800/1.3830 until Friday, when price sold off. The pair is currently trying to push back towards the July 16th lows at 1.3568.
On a 240-minute timeframe, GBP/USD has been trading in a symmetrical triangle since the July lows. After a brief spike higher out of the triangle on September 14th, the pair pulled back into the triangle and tested the lower trendline near 1.3643. Thus far, it has held. Support below is at yesterday’s lows near 1.3640, then August 20th lows at 1.3605 and the July 20th lows of 1.3571. Horizontal resistance about is at 1.3726, ahead of the 50- and 200-Day moving averages near 1.3800 and 1.3830, and then the downward sloping trendline of the triangle near 1.3850. Notice the RSI on the 240-minute timeframe has bounced from oversold territory back into neutral territory, a sign that the pair may need to pause if it is to move lower.
Source: Tradingview, Stone X
The FOMC and the BOE both have meetings this week. Markets will be keen on the on the “dot plots” from the FOMC meeting and eager to see if any kind of taper timelines are established. In addition, markets will be watching the ongoing debt ceiling saga in the US. For the BOE, markets will be watching to see if the central bank continues with its taper or decides to wait until the furlough program ends at the end of September. Watch for volatility in GBP/USD later in the week!