GBP/USD is in focus ahead of the week’s key events: the Federal Open Market Committee (FOMC) and Bank of England interest rate decisions.
We also have UK CPI and retail sales, as well as global PMI data to look forward to to this week. The Bank of England may ultimately raise interest rates by 25 basis points, while the FOMC is expected to keep policy unchanged. I think this cable may be heading towards a low of 1.20 seconds.
Key macro highlights for cable this week
Before discussing the FOMC and BoE, the key macro events for GBP/USD this week, let’s take a quick look at the GBP/USD-related economic calendar to get an idea of what other important data releases could impact GBP/USD:
UK consumer price index
Wednesday September 2007: British Summer Time
UK economic indicators have worsened in recent months as high Inflation and borrowing costs rise. But wages continue to rise sharply as workers demand higher wages.
Inflation now needs to fall quickly to arrest the price-wage spiral before it spirals out of control. Last month, CPI did fall sharply from 7.9% year-on-year in June, but it was still at a very high 6.8% in July.
Due to the base effect, CPI is expected to continue to decline rapidly in the coming months. However, year-on-year growth in August is expected to rebound to 7.1% from 6.8% in July. Core CPI is expected to be 6.8%, compared with 6.9% last month, while RPI is expected to rise to 9.3% from 9.0%.
Federal Open Market Committee Policy Decisions
Wednesday, September 2019: British Summer Time (BST)
Robust U.S. inflation data and surprising strength in some other key parts of the world’s largest economy have fueled speculation that the Fed’s tightening cycle may not be over yet.
While no policy changes are expected at this FOMC meeting, traders will be looking for clues about the next meeting. If there is a strong bias toward an eventual rate hike before the end of the year, this should support the dollar on short-term declines.
So keep an eye on the policy statement and the latest dot plot, and listen to what Powell has to say at the FOMC press conference. The Fed may signal that it may raise interest rates again before the end of the year – thanks to a strengthening U.S. consumer and rising inflation expectations that are undoubtedly driving a slowdown in deflation.
The Federal Open Market Committee (FOMC) is likely to revise its 2024 midpoint chart upward to indicate a smaller rate cut than its previous forecast of 100 basis points. If so, this would further discourage bearish bets on the US dollar, keeping GBP/USD under pressure.
There are no important U.S. data indicators that could influence the Fed’s thinking ahead of this week’s policy meeting. Michigan confidence data on Friday showed little change in consumer sentiment in September, but expectations for the economy and inflation did improve, with inflation expectations for the coming year falling to 3.1%.
On Thursday, we saw that retail sales in August were better than expected (up 0.6% month-on-month), although this was mainly driven by fuel sales. Producer prices also came in higher than expected, while jobless claims fell slightly after a sharp drop last week, adding to optimism that a hard landing was avoided.
Bank of England policy decision
Thursday, September 2112:00 BST
Sterling’s recent weakness reflects investors scaling back hawkish bets on the Bank of England on weaker-than-expected UK data. Last week, GDP disappointed, sounding the alarm for a recession.
But wage growth remains strong, suggesting consumption is picking up. Will this worry the MPC about the risk of a price-wage spiral spiraling out of control?
The Bank of England will see the latest consumer price index data a day before its interest rate decision. With economists expecting CPI to rise from the previous month, this is unlikely to prevent the MPC from voting for another 25 basis point rate hike, taking the Bank Rate to 5.50%, as many expected.
But will this be a peak in interest rates? Goldman Sachs analysts certainly think so. They now expect the Bank of England to pause raising interest rates in November, abandoning their previous view that the central bank will raise rates again.
This is because they “believe that, given their preference for flatter peaks, there is a greater chance that ongoing wage and price pressures will cool sufficiently to allow the MPC to pause.”
Goldman Sachs isn’t the only firm to sharply lower its expectations for future tightening. Investors also appear to have made up their minds. Weak data from the UK led investors to lower their expectations for a rate hike from the Bank of England.
A rate hike of about 75 basis points had been priced in about a month ago. Now, the market expects prices to rise about 35 basis points to a peak. This means the Bank of England is likely to finally raise interest rates by 25 basis points on Thursday, just as the European Central Bank hinted last week.
Let’s see if the Bank of England rate setters will agree with this view, removing the key phrase from the previous rate statement: “If there is evidence of more sustained pressures, further tightening of monetary policy will be needed.”
If the Bank of England makes it clear that this is the highest point, as the ECB did last week, for example suggesting that interest rates are “sufficiently restrictive”, then this should hurt sterling. Regardless, this is certainly what I’m looking for, so I think GBP/USD could fall as low as 1.20 from here.
GBP/USD could fall to lows of 1.20
Like EUR/USD price action, GBP/USD also fell on Thursday before falling further on Friday. Earlier this week, the stock rebounded slightly on profit-taking ahead of the week’s key macro events.
But the technical damage has been done, with rates closing below the 200-day moving average on both Thursday and Friday. Therefore, watch for renewed weakness in GBP as it tests key resistance around 1.2400 (a few pips above and below), which was previously support.
Like EUR/USD, GBP/USD is likely to fall below May’s corresponding low of 1.2308, with there not being many obvious reference points below this level other than round numbers such as 1.22, 1.21 and possibly even 1.20.
Given the growing bearish momentum, bulls must wait for a key reversal pattern to emerge before looking for bullish trade ideas.
Originally published on MoneyShow.com
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