SUMMARY
The sentiment towards Fed Policy is pricing in a pivot due to last week’s CPI report coming in slightly lower than expected. This is supporting the GBP/USD against the downside along with continued less-than terrible sentiment of BoE policy after their meeting at the start of the month on November 3rd.
This optimistic sentiment is likely to be tested on Wednesday when the UK CPI data is out along with the US Retail Sales.
GBP/USD is likely to see a fall to the downside if UK CPI comes in higher than the 11 percent expected. This is also likely to be expected if the US retail sales comes in above the market expectations of 0.0 percent.
Following this, Thursday will see the much awaited UK Government's Autumn Statement with latest expectations being spending cuts of about £35bn and tax rises of around £20bn.
The risks are tilted towards the downside and so the plan is to short the GBP/USD below a Stop Loss of 1.226 which is well positioned above the Long Term potential resistance based on Fib levels at 1.212.
Risk Level One orders are placed.
SENTIMENT
BOE POLICY SUPPORTS THE GBP/USD AGAINST MOVES LOWER
On Thursday the 3rd of November the Bank of England hiked rates by 0.75 percent and commented that higher rates are necessary to control inflation but probably not as high as has been priced in. This was interpreted as a dovish move but in reality it is simply less-hawkish.
The outlook is still dire as the bank projects a two-year recession but the not-as-bad as expected moves on rates will improve sentiment towards borrowing costs. This in turn will move the FTSE 100 away from overly-bearish moves as earnings pick up due to less-than-terrible consumer spending and foreign investment. There may also be some pick up on government bonds resulting in a lower peak yield than had been expected.
FED POLICY TO KEEP GBP/USD IN A RANGE
On Wednesday the 2nd of November the Federal Reserve hiked rates by 0.75 percent and commented that it would be better to raise too-high rather than too-low. This has been interpreted as a hawkish move.
More recently, last week the latest US CPI reading came in a little under expectations and speculators are re-positioning for a Fed pivot. However, on Friday, Fed policymaker Waller commented that there is no softening of policy although as a known hawk these remarks had limited effect on keeping the GBP/USD down.
FUNDAMENTALS
UNITED KINGDOM
On the 3rd of November, the Bank Rate was hiked by 0.75 to 3.00 percent. This matched the market expectations and was higher than the 0.50 percent hike at the September meeting.
This is the eighth consecutive rate hike and the largest hike since 1989. The MPC remarked that further hikes may be required although at a lower peak than currently priced into markets.
The next meeting is on Thursday the 15th of December and the long term outlook is for higher rates although it is likely that rates will be less hawkish than expected.
The outlook for:
UK GDP is pessimistic deterioration (pr. )
UK CPI is indifferent improvement (pr. )
UK Unemployment is pessimistic deterioration (pr. pessimistic indifference)
UNITED STATES
On the 2nd of November, the Federal Funds Rate was hiked by 75bps to between 3.75 and 4.00 percent. This matched the market expectations and also matched the previous hike at the September meeting.
This is the sixth consecutive rate hike and borrowing costs are now at the highest since 2008. During the press conference, Chair Powell commented that the rates will be higher than previously expected.
The next meeting is on Wednesday the 14th of December and the long term outlook is for higher rates although it is likely that rates will be more hawkish than expected.
The CME FedWatch tool indicates 80 percent odds of a 0.50 hike and 20 percent of a 0.75 hike (pr. 60/40).
The outlook for:
US GDP is pessimistic deterioration (pr. )
US CPI is optimistic improvement (pr. )
US Unemployment is pessimistic deterioration (pr. )
TECHNICALS
SHORT TERM
The short term view (month on month) shows that the GBP/USD has been uptrending since the start of the month (November) when the BoE hiked rates but commented that markets had priced in higher rates than may be required.
This uptrend was further supported when the US CPI report came in slightly lower than expected and weakened the US dollar.
There was a short term fade as Fed Waller commented that the policy will not be softnened, although as a known hawk, the effect was minimal and GBP/USD has continued to climb.
LONG TERM
The long term view (year on year) shows that the GBP/USD has been downtrending since last year, which began in mid-2021 when the inflation rate began to pick up in the UK and expectations were elevated that the Bank of England would look to raise rates sooner than had been previously expected.
This fall in sterling was pressured further as safe haven flows into the US dollar picked up this year in February 2022 as Russia invaded Ukraine. The subsequent sanctions that followed and lack of supply to the energy markets pushed global inflation higher than had been anticipated and central banks have had to tighten at a record pace. This has lowered global growth which keeps the USD higher and GBP lower.
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