Talking Points:
– The British Pound put in an aggressively bullish move around last week’s BoE rate decision, and is seeing a bit of retracement to start this week after a speech from BoE Governor, Mark Carney.
– With the recent bout of GBP strength we’ve seen a rise in retail sellers. IG Client Sentiment sits at -2.46 as of this writing, and given retail traders’ traditional contrarian nature, this is bullish for the pair.
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In our last article, we looked at GBP/USD ahead of a key Bank of England rate decision. While we walked into that meeting with little expectation for any actual moves on rates, the big item of interest was whether the BoE would warn of impending rate hikes in the effort of tempering inflation. While there were a lot of questions around the BoE’s stance, there were few around the rising inflation that’s been seen in the British economy since the bazooka of stimulus launched by the BoE, post-Brexit. With August inflation running up to 2.9%, this became something that the BoE could no longer ignore; and when the bank warned that some monetary stimulus may need to be removed in the coming months, the British Pound ran-higher as traders began to price-in rate hike bets out of the U.K. This catapulted GBP/USD above the vaulted 1.3500 level that we had looked at last week, and this put the currency in a bullish position as we set a fresh one-year high.
GBP/USD Hourly: Aggressive Top-Side Pop After Bank of England
Chart prepared by James Stanley
To open this week, BoE Governor Mark Carney gave a speech at the IMF in Washington D.C. In that speech, we heard more of the familiar concerns around the British economy as Brexit discussions continue. But perhaps the most important line for currency markets was when Mr. Carney said that interest rates will “rise a limited extent at what can be expected to be a gradual pace, settling at levels significantly below those seen pre-crisis.” This acted as an immediate buffer to that topside run in the British Pound, and already we’re seeing the currency correct.
GBP/USD Daily: Price Falls to 50% Retracement of Brexit-Move, Prior Swing-High
Chart prepared by James Stanley
The big question is how much firepower this warning may carry. Are markets to believe that one rate hike will quell the rising inflation being seen in the U.K.? And further – once Mr. Carney and co. do actually hike, what’s next? More monetary accommodation? How can we know that inflation will drop after one or two rate hikes, to the spot where the Bank of England can foreseeably forecast future rate policy? This raises a whole host of questions, none of which have defined answers, because they’re all dependent on something that hasn’t yet happened (that first rate hike in more than 10 years).
More pressing to the near-term performance of GBP/USD will be the continued sell-off in the U.S. Dollar along with British inflation prints. At this stage, price action remains bullish, and prices are testing a key support level at 1.3478. This is the 50% marker of the ‘Brexit move’ in the pair, and just below we have two key areas that could be used for bullish continuation approaches around 1.3350 and 1.3250. Each of these can open the door for stops to be placed under the confluent support zone that runs from 1.3117 (the 38.2% retracement of the same move) and 1.3187.
GBP/USD Four-Hour: Subordinated Support Levels Below Current Support
Chart prepared by James Stanley
— Written by James Stanley, Strategist for DailyFX.com
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