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Mixed U.S. GDP Report Curbs GBP/USD Losses Ahead of BoE Meeting

Mixed U.S. GDP Report Curbs GBP/USD Losses Ahead of BoE Meeting

2018-10-26 15:30:00
David Song, Strategist
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British Pound Talking Points

GBP/USD pares the sharp decline from earlier this week as updates to the U.S. Gross Domestic Product (GDP) report reveal a limited threat for above-target inflation, but recent price action casts a bearish outlook ahead of the Bank of England (BoE) meeting as the exchange rate continues to carve a series of lower highs & lows.

Image of daily change for major currencies

Mixed U.S. GDP Report Curbs GBP/USD Losses Ahead of BoE Meeting

Image of daily change for gbpusd rate

GBP/USD bounces back from a fresh weekly-low (1.2778) as a material slowdown in the core Personal Consumption Expenditure (PCE), the Federal Reserve’s preferred gauge for inflation, overshadows the 3.5% expansion in the growth rate, with the price gauge narrowing to 1.6% from 2.1% per annum in the second-quarter of 2018.

Image of Fed interest rate forecast

Signs of limited inflation may keep the Federal Open Market Committee (FOMC) on hold at its next meeting in November as the central bank pledges to ‘assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective,’ but the recent data prints may do little to derail Chairman Jerome Powell & Co. from the hiking-cycle as policymakers remain upbeat on the economy. At the same time, the ongoing shift in U.S. trade policy may push the FOMC to bolster its hawkish outlook as higher import prices start to filter into the economy, and the central bank may prepare U.S. households and businesses for an imminent rate-hike as a growing number of Fed officials see a risk for above-neutral interest rates.

With that said, the BoE meeting on November 1 may do little to alter the near-term outlook for GBP/USD as the Monetary Policy Committee (MPC) is expected to keep the benchmark interest rate at 0.75%, and more over the same from Governor Mark Carney & Co. may ultimately produce headwinds for the British Pound as the central bank appears to be in no rush to implement higher borrowing-costs. In turn, the rebound from the yearly-low may continue to unravel following the failed attempt to test the September-high (1.3299), with a further pickup in GBP/USD volatility raising the risk for a more material shift in retail interest as traders appear to be fading the weakness in the exchange rate.

Image of IG clien sentiment for gbpusd

The IG Client Sentiment Report shows 77.0% of traders are now net-long GBP/USD, with the ratio of traders long to short at 3.35 to 1. Keep in mind, traders have remained net-long since September 20 when GBP/USD traded near 1.31450 even though price as has moved 2.5% lower since then. The number of traders net-long is 7.2% higher than yesterday and 32.8% higher from last week, while the number of traders net-short is 11.1% lower than yesterday and 29.8% lower from last week.

The persistent pickup in net-long position suggests traders are attempting to fade the selloff in GBP/USD, and a further shift in retail sentiment may continue to offer a contrarian view as the exchange rate as both price as the Relative Strength Index (RSI) snap the bullish formations from August. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

GBP/USD Daily Chart

Image of gbpusd daily chart
  • Broader outlook for GBP/USD remains capped by the 1.3310 (100% expansion) to 1.3370 (78.6% expansion) area, with the recent series of lower highs & lows keeping the downside targets on the radar.
  • Need a close below the 1.2800 (50% expansion) handle to open up the 2018-low (1.2662), which largely lines up with the Fibonacci overlap around 1.2630 (38.2% expansion) to 1.2640 (23.6% retracement), with the next downside region of interest coming in around 1.2370 (50% expansion) to 1.2440 (50% expansion).

For more in-depth analysis, check out the Q4 Forecast for the British Pound

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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