INTENDED USE: Analysis that can be studied to aid your Pound Sterling trade planning.
DERBYSHIRE GB / AUGUST 22nd, 2023 - Updated outlook. Next update after the PMI data on Wednesday. August 23rd or before if any significant event occurs.
Macroeconomic Snapshot
Bank of England Monetary Policy Committee: The August meeting matched expectations with a 0.25% hike of the Bank Rate setting it at 5.25% which is up from 5.00% and the 0.50% hike in June. The next meeting is due on Thursday, September 21st.
The UK interest rate is anticipated to be raised again although the peak is near which is likely to lead to stabilised gilt yields which may dissuade investors and limit upward support on the value of the pound
Gross Domestic Product Growth Rate: Preliminary Q2 ‘23 estimate came in higher than expected at 0.2% expansion and up from 0.1% expansion in Q1 ‘23. The final Q2 report is due on Friday, September 29th.
UK GDP is anticipated to improve this year which may increase investor confidence in UK stocks which may limit downward pressure on the value of the pound.
Consumer Price Index: July matched expectations coming in at 6.8% inflation and hugely down from 7.9% in June. The August report is published on Wednesday, September 20th.
UK CPI is anticipated to improve further this year but to remain above target, investor confidence in UK stocks is likely to improve which may limit downward pressure on the value of the pound.
Labour: June ‘23 report came in higher than expectations at 4.2% which is higher than 4.0% in May ‘23. The July report is due on Tuesday, September 12th.
UK unemployment is anticipated to remain steady this year which may stabilise investor confidence in UK stocks which is likely to limit downward pressure on the value of the pound.
Cost-of-Living Crisis: The cost-of-living crisis has reduced the spending power of consumers and resulted in slower economic growth.
This is likely to lead to reduced foreign investment in the stock market and is expected to apply downward pressure on the pound’s value.
Russian Invasion of Ukraine: The war is having a detrimental effect on the global and UK economy by causing higher energy prices, supply chain disruptions, financial market volatility, refugee crisis and geopolitical uncertainty.
The war will at times cause risk aversion and may lead to decreased foreign investment in the stock market and downward pressure on the pound’s value.
GBP/USD (Previous Three Months)
The GBP/USD is currently taking pause from its retracement of the uptrend that tested the 61.80% level near 1.262 and a move below would break the uptrend. The recent moves can be explained as follows:
May 25th Start of Uptrend: The GBP/USD began its uptrend at the end of May as the Pound was bought as expectations rose that the BoE would raise higher than previously thought.
June 16th Retracement: USD strengthened as speculation mounted that the Fed would hike further than expected following some strong economic data.
June 29th Uptrend Resumes: USD weakened as the PCE data points to a lower peak Fed Funds rate.
July 14th Retracement: USD strengthened as speculation mounts that the Fed may need to remain tighter for longer than previously thought.
GBP/USD Outlook
Upcoming and Recent Events:
Thursday, August 10th
US CPI y/y climbed to 3.2% vs 3.3% exp
Wednesday, August 16th
GB CPI y/y fell to 6.8% vs 7.9% prev.
FOMC Meeting Minutes Fed Leaves Door Open to Further Tightening
Thursday, August 17th
US Unemployment Claims fell a little more than expected to 239K from 248K prev.
Wednesday, August 23rd
GB Flash Manufacturing PMI 45.1 exp. 45.3 prev.
GB Flash Services PMI 50.9 exp. 51.5 prev.
US Flash Manufacturing PMI 48.9 exp. 49.0 prev.
US Flash Services PMI 52.1 exp. 52.3 prev.
Thursday, August 24th
Day 1 of the Jackson Hole Symposium
US Unemployment Claims 239K exp. 239K prev.
Friday, August 25th
Day 2 of the Jackson Hole Symposium
Intermarket Assessment
CME Group 30-Day Fed Fund futures
September: falling sentiment of a hold, 85% in favour (from 90%), 15% for a 0.25 hike (from 10%).
November: falling sentiment of a hold, 55% in favour (from 57%), 40% for a 0.25 hike (from 37%).
Six Month Bond Yields
Gilts: rising to 5.82% from a peak of 5.80% last week.
Treasuries: Rising to 5.53% from a peak of 5.51% the previous week.
Stock Market
S&P500: Slightly bearish holding above 100 and 200 day moving averages after falling below 50 day moving average last week.
FTSE 100: Very bearish holding far below the 50,100 and 200 day moving averages after falling below them all at the start of August.
GBP/USD Analysis
Value of the EUR/USD to remain above 1.26: The previous three month moves have created an uptrend climbing from the 1.23 area to the 1.31 area although it has since fully retraced to test the 61.80% fibonacci. The macroeconomic situation suggests the uptrend is likely to hold.
Shorter Term Value of the GBP/USD to remain above 1.265 unless the GB PMI data due on Wednesday significantly disappoints: The previous three week moves have been slowly climbing from 1.265 to 1.278 on the back of a stronger GBP as higher rates may be required. The base case for events this week are favoured towards a steady pound, however an unexpectedly low PMI reading could signal that the BoE need to halt any further hikes and cause significant pound weakness over the short term.
Gavin Pearson
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