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GBPUSD stalled in resistance area
The divergent interpretations of the meeting between the Fed (Federal Reserve) and the BoE (Bank of England) took GBPUSD into prior resistance levels. However, USD buying was seen as markets went risk off, causing price action to stall in this area, halting gains into the January high.
This week is expected to be very quiet on the data front, with the only notable data from the US being the Fed’s preferred measure of inflation, the Core PCE index.
Last month, there was a surprise uptick on the print, adding to bets that the Fed will have to raise rates further. However, recent turmoil in the banking sector has eased rate hike expectations, as the Fed continues to battle between supporting financial stability or price stability. Markets are expecting the print to show that prices eased from 0.6% to 0.4% in January, which would back the recent rate cut expectation from the Fed.
This week, there is very little expected to come out from the UK. So far, the UK has escaped any negative banking-turmoil headlines and therefore this has been supportive of GBP.
Risk appetite appears likely to drive the GBPUSD this week, with any further adverse baking headlines expected to add to USD safe-haven buying, taking prices out of the resistance area. However, any optimism that the baking sector turmoil is not spreading could well see prices test the high from December and January.
Trading into resistance once again
Early last week, trading met prior resistance before new support was offered after concerns involving Credit Suisse saw the buying of USD as a safe haven. As markets calmed, we saw GBPUSD head towards the resistance area, with the possibility that we could see the 2023 highs tested again from break through.
On Wednesday evening, the Fed (Federal Reserve) will be in focus, with markets now only expecting a 0.25% rate hike due to recent events. However, there is a risk that should market volatility remain high, the Fed may elect to do no hike in the coming meeting, but may choose to keep open the possibility of future hikes, depending on further data.
On Friday, services and manufacturing data are expected to be released, with soft data potentially adding to recession concerns.
This week the decision by the BoE will be the main focus, with markets expecting that this 0.25% hike could be the last. Core inflation is expected to ease to 5.7%, with PMI figures for March expected to be released later this week.
Risk appetite in the markets will also be a contributing factor in price action this week, should sentiment increase then we could see markets test resistance levels once again.
Support level still holding
Following Fed (Federal Reserve) member Powell’s testimony on Tuesday, support levels were tested with suggestions that the Fed would be willing to re-accelerate rate hikes should data add to the argument of elevated inflation.
Data showing the number of people filing for jobless claims has increased and unemployment rose to 3.6%, this along with wages not rising as much as expected caused the markets to dial back March’s rate hike expectations.
UK GDP figures coming in higher than expected also gave support to the pound.
This week, US consumer and producer inflation data will be the main highlight and focus. Should February’s core inflation number continue to climb, US dollar buying will be encouraged as markets may well increase the expectation of a 0.50% hike by the Fed next week. US retail sales data will also provide a gauge of consumer activity.
This week in the UK, focus will fall on the job market and whether the data will highlight any inflationary pressures. Should wages come in higher, then markets will raise the expectations of any interest rate rises by the BoE, encouraged by the recent expected growth figures that came in better than expected.
Next week’s BoE meeting and its following narrative will be very important.
Price action testing support once again
There remains a clear divergence on interest rate policies between the BoE (Bank of England) and the ECB (European Central Bank) especially after Governor Bailey cautioned markets against rate moves in either direction. However, some comments from the ECB continue to suggest that they may have to hike rates further.
The lows of 2023 continue to see the markets buy and support the pound from dropping lower, but as we can see the downtrend from the start of February remains intact. This February downtrend is causing prices to trade below the 20, 50, and 200 day moving averages.
- Inflation expectations are seen to be easing in the US, countering the need for the Fed (Federal Reserve) to keep hiking interest rates and interest rate projections decline.
- The BoE turn hawkish
In respect of the US dollar, Fed Chair Jerome Powell will be appearing in congress to present the Fed’s semi-annual Monetary Policy Report
To no one's surprise, the focus for the markets will be whether there will be any hints regarding the Fed accelerating their rate hike cycle beyond the current projections, ahead of the Fed meeting next week. Should they do so, it would be expected that the US dollar will continue to strengthen.
Later this week there will be February’s jobs report, with January’s non-farm payroll figure coming in with a blockbuster number at 517,000, far above the average over the last year. Current expectations are expected to show that 200,000 jobs have been added in February.
This week in the UK, focus will be back on growth. In recent weeks there has been growing optimism that the UK is performing better than what was initially expected, with Friday's data expected to give a first taste of economic growth for January. Markets are expecting growth to be at 0%, following a contraction in December.
Price action continuing lower
Data points and the latest minutes from the Fed (Federal Reserve) meeting continue to add to the argument that the Fed will keep hiking interest rates higher for longer. Peak rates are currently priced at 5.4%, but Wall Street economists are now suggesting that the Fed may have to hike rates to 6.5% to defeat inflation.
Current divergence on growth outlooks also continues to favour the US over the UK.
Inflation expectations ease in the US, countering the need for the Fed to keep hiking interest rates and interest rate projections decline.
The UK’s growth outlook exceeds expectations.
This week, data highlights from the US come in the form of February’s ISM and S&P manufacturing PMIs, expected to show a slight increase with the week ending with both agencies releasing the latest service sector numbers.
These will be very important, particularly the prices paid, given that it has been an attributing factor in rising inflation in the US.
There will also be a host of Fed speakers predicted to remain hawkish, suggested by recent data.
A very quiet week ahead for the UK, with the only highlight being a second estimate on the PMI data from last week, which suggested that the UK may well be avoiding a recession. A revision higher will add to the green shoots of positive sentiment recently seen in the UK.
Whilst recent data suggests that there is an improving outlook in the UK, the pressure on the Fed for further rate hikes is the dominant factor on the GBPUSD pair, which is evident in recent price action.
Continued hawkish chatter from Fed members and its supportive data could well see GBPUSD test the low seen in January.
Monday, 20 February 2023
Price action to break lower?
Divergent monetary policy
Data and comments from Fed (Federal Reserve) members suggest that they will continue to hike interest rates. Whilst in the UK, lower inflation and dovish comments from the BoE (Bank of England), suggest that we are close to peak interest rates.
Divergent growth expectations
The UK economy is still touted to be one of the worst performing out of the countries that form the G7 (The International Group of Seven).
In the US, inflation expectations ease, countering the need for the Fed to keep hiking interest rates and causing interest rate projections to decline.
The growth outlook from the UK exceeds expectations.
The first set of data regarding economic activity for February is due to be released this week, expected to gauge whether January’s momentum has continued. The second reading of Q4 growth is expected to come in at 2.9% and the minutes from the latest FOMC meeting will be released on Wednesday night.
The main event will likely be the Core PCE Index (the Fed’s preferred measure of inflation) which is expected to show that prices rose by 0.4% in January versus 0.3% in December 2022.
On Tuesday, the UK’s release of February’s preliminary PMI data will be its main focus, currently expected to show a continuing decline in activity.
Overall, GBPUSD will likely be seen to consolidate higher at the start of the week as markets reposition themselves for the FOMC minutes and the Core PCE index. Anything after these events will indicate if the Fed will need to do more to combat inflation, then price action would be expected to continue lower
Downtrend imminent?
Although the less hawkish comments from Fed (Federal Reserve) member Powell took some of the wind out of the dollar’s sails at the midweek point, general weakness in the euro saw rates come and drop to the rising support line. Following the uptrend from September, we could well see near-peak EURUSD rates.
The less hawkish comments from Fed (Federal Reserve) member Powell took some of the wind out of the dollar’s sails at the midweek point, with price action consolidating following the prior week’s falls due to January’s job numbers. There seemed to be hesitancy in the markets ahead of this week’s inflation numbers.
This week will be busy on the data front, with Tuesday’s inflation numbers taking the headlines.
January’s job numbers have caused markets to speculate that the Fed may have to hike interest rates higher than initially forecasted. Currently being priced by the markets, some are suggesting interest rate hikes up to 6% versus 5.25%.
Currently, we are expecting inflation to ease further to 6.2% and 5.5% on the core number for the month of January. Therefore, a higher reading would be a big surprise and seems likely to add further strength for USD.
On Wednesday, we will have January’s retail sales numbers from the US, which will give a measure of consumer spending and is expected to show an increase in sales of 1.7%.
Job and inflation data for the UK will be in focus and will largely dictate what kind of rate hike we get from the BoE (Bank of England) in March.
Slower wage growth and lower inflation could well mean that rate hikes of 0.50% are in the past with the Bank opting to slow the pace of the hikes, supporting the Bank’s dovish stance and a potential GBP negative.
The direction for GBPUSD will be dictated by the US inflation number and should it be higher, then we could well witness déjà vu of last year’s move on the currency pair.
Downtrend imminent?
Following the Fed (Federal Reserve) and BoE (Bank of England) meetings last week, there is anticipation that perhaps we are at the peak for interest rates for both economies with markets factoring further rate cuts for later this year.
The main differentiation between the two was that the Fed was prepared to adjust expectations depending on data, whereas the BoE will no longer act “forcefully” if needed.
On Friday, the nonfarm payroll data showed 517,000 new jobs and ISM services bouncing back for January. This set the landscape for the Fed to continue hiking rates, albeit at a slower pace to continue their fight against inflation without hurting growth.
As a result, we saw the biggest drop on GBPUSD since November, and after the prior week showed indecision, it would seem that the GBP September uptrend is over and we could be at the start of a move lower.
On the data front, we’ll be keeping an eye on January’s house price data from Halifax to gauge the impact of higher interest rates on the housing sector.
Last week, we saw mortgage approvals drop to a two and a half year low. The first estimate for growth in Q4 2022 will be out on Friday 10 February. In recent weeks, we’ve seen better than expected growth from the US and Europe, adding to optimism for each respective economy: will the UK be able to shake off its current damning outlook?
The only major data point for the US will be the U. of Michigan consumer sentiment figures for February.
Following the Fed and BoE meetings, this week we’ll be hearing from members of each respective Central Bank with markets likely to take cues from Fed member Powell, especially following the US job figures from Friday.
Momentum in the market seems to favour further downside for GBPUSD this week unless UK data can show that the economy is doing better than expected.
Uptrend limited?
Weakness of the US dollar continues to be one of the main drivers for GBPUSD continuing its September uptrend, with thoughts of inflation easing causing markets to suggest that the Fed may cut rates later this year. However, the upside still looks limited due to concerns over the UK economy this year. January’s preliminary PMI figures from last week supported this with economic growth contracting further.
Last week, US GDP figures for Q4 came in higher than expected, adding to the narrative that the US economy will avoid a hard landing this year.
The Fed (Federal Reserve) is expected to slow down their pace of interest rates from 0.50% to 0.25% with signs that inflation is easing.
The accompanying rate statement will be key in seeing if the markets are correct when pricing in rate cuts for the latter half of this year.
Last week, we saw the BoC (Bank of Canada) confirm that they will pause their rate hike cycle but with little guidance for how long the pause would last. If the Fed suggests a pause for the rest of the year, rate cut expectations could be erased, causing the US dollar to gain.
The BoE (Bank of England) is expected to do their last 0.50% hike in this cycle. Communication for future hikes will be important, as well as how each individual member will vote. December’s meeting was perceived as dovish. If this narrative continues, particularly with this year’s gloomy outlook for the UK economy, markets will expect rate cuts later this year. Should this be the case, the pound would be expected to weaken.
Uptrend continues but limited?
Weakness of the US dollar continues to be one of the main drivers for GBPUSD continuing its September uptrend, with thoughts of inflation easing causing markets to suggest that the Fed may cut rates later this year. However, the upside still looks limited due to concerns over the UK economy this year.
This week, focus will turn to the growth outlook, with preliminary PMI data for January to be released on Tuesday, 24 January. UK composite PMIs are forecasted to show slowed activity for January from December - which will bring about concerns over the economy.
US composite PMIs are forecasted to show better activity in January this week as well.
Later this week, US GDP figures for the 4th quarter are expected to show that economic growth slowed from 3.2% to 2.7%.
For now, the upside is limited to December highs ahead of the Central Bank meetings next week.
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