Wed, Dec 07, 2022 @ 13:02 GMT
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Currency Pair of the Week: GBP/USD

It’s not too often that we cover the same currency pair for our “Currency Pair of the Week” 2 weeks in a row, however this week it seems appropriate. Last week, the Bank of England hiked interest rates by 50bps to bring the key rate to 2.25%, disappointing some traders who were hoping for a hike of 75bps.  Recall that inflation in the UK has been hovering near 10% for the last few months and the BOE has signaled that the UK may already be in a recession.  The Bank of England also indicated that it would begin selling off its inventory of UK Government bonds that it bought over the last decade to the tune of 80 billion Pounds over the next 12 months. A day later, new Prime Minister Liz Truss announced a number of new tax cut initiatives and new spending programs to try and boost economic growth.  Finance Minister Kwasi Kwarteng announced the sweeping changes to the House of Commons.  However, although the new PM may have meant well, many are concerned that that plan could be underfunded, and therefore, the government would have to turn to the bond market.  This means that the Treasury would have to issue new debt and pay higher returns due to the increase in bond yields.  In addition,  many are concerned that the tax cuts will be inflationary.  As a result, markets are pricing in over a 100bps hike for the BOE at the November meeting, with some even calling for an inter-meeting hike.

The US FOMC last week hiked rates by 75bps to bring the Fed Funds rate to 3.25%.  However, unlike that of the UK, inflation is beginning to slow, and the Fed sees inflation “only” at 5.4% at the end of 2022.  In addition, the Feds “dot plots” showed that members expect the Fed Funds to be at 4.4% by the end of the year.  This would imply roughly an additional 125bps of tightening, with possibly a 75bps hike in October and a 50bps hike in December.  In addition, although the GDP data shows that the US is in a ‘”technical recession”, the Fed refuses to follow the definition of 2 consecutive quarters of negative growth as a recession, and says that the US economy is currently NOT in a recession.  Fed Chairman Powell said that his main message has not changed since Jackson Hole: that the Fed will fight inflation until it gets back to 2%, even if it causes a period of growth below trend and a softening of the labor market.  Friday the US will release the Fed’s favorite measure of inflation, Core PCE.  Expectations are for the index to uptick to 4.7% YoY in August vs a July reading of 4.6% YoY.

GBP/USD has been on a wild ride the last few days, to say the least!  It was just April 22nd when the pair broke below 1.3000.  Since then, the pair traded in an orderly downward sloping channel moving all the way down to 1.1410! However, on Wednesday last week, GBP/USD broke below the bottom trendline of the channel and it was off to the races.  On Friday, after a poor PMI reading and the mini-budget announcement, the pair fell from 1.1252 down to a low of 1.0850, a move of over 400 pips.  Today, during a thin, illiquid market during the Asian time zone, traders pushed GBP/USD to a low of 1.0356, a new all-time low for the pair taking out the lows of 1985 at 1.0520.

Source: Tradingview, Stone X

On a shorter, 240-minute timeframe, GBP/USD has been in an even tighter range since moving lower August 10th, when the pair was trading near 1.2275.  On September 12th, the pair broke though the top trendline of a channel, only to move back inside the range the next day.  As is often the case, when a currency pair tries to break out of one side of a range and fails, it often moves to test the other side.  On Friday, GBP/USD broke below the bottom trendline near 1.1000. On the Asian reopening today, the pair fell to 1.0356, a range of 575 pips!  Support below is hard to find at this point!  1.0603 offers some horizontal support, however, price can easily fall to the lows of the day. GBP/USD halted at the first resistance level near the 38.2% Fibonacci retracement level from the highs of September 13th to today’s lows near 1.0884.  The bottom trendline of the shorter-term channel is just above there at 1.0970, then the 50% retracement from the above timeframe at 1.1048.

Source: Tradingview, Stone X

Will the new budget from PM Liz Truss “break the economy” or will it help everyday citizens as she says it will? The Bank of England was just on the wires saying that it will assess the Pound drop and fiscal plan at the next scheduled meeting (November 3rd).  However, can GBP/USD hold up that long? Or will the central bank have to intervene and possibly have an emergency rate hike?  Manage risk appropriately!

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Forex.com
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