Talking Points:
- We’ve spent most of the year so far looking for a rate hike from the Bank of England, largely in response to the inflation spike from last year as inflation ran above 3%. Are we finally going to get that adjustment from the BoE at their ‘Super Thursday’ rate decision on the calendar for this Thursday?
- Markets are anticipating 25 basis points of adjustment at this meeting, and it would probably be a far bigger deal if a rate hike does not happen here. More pressing to price action in Cable will likely be the bank’s expectations for forward-looking economic conditions, and whether any additional rate hikes might be on the horizon.
- Quarterly Forecasts have just been updated, and the Q3 forecast for GBP/USD is available from the DailyFX Trading Guides Page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.
Want to see how retail traders are currently trading GBP/USD? Click here for GBP/USD Sentiment.
GBP/USD Down-Trend in Focus Ahead of BoE ‘Super Thursday’
The British Pound is in the spotlight this week as we near the August ‘Super Thursday’ rate decision out of the Bank of England. Markets are currently anticipating a rate hike at this meeting, with probabilities hovering near 90% for a 25 basis point adjustment. And while that same theme helped to drive GBP-strength as we approached the May ‘Super Thursday’ event, current price action in Cable remains mired by the down-trend in the pair that started in April.
That Q2 down-trend began around the release of March inflation numbers, taking place in mid-April. At the time, GBP/USD was flying high on the prospect of a more-hawkish Bank of England. But, as inflation disappointed, that optimism was soon priced out; and by the time we got to the May ‘Super Thursday’ rate decision, GBP/USD had already re-engaged with the 1.3500 level. The next two-and-a-half months have brought even more selling, and this eventually brought upon a re-test of the vaulted psychological level of 1.3000.
GBP/USD Daily Price Chart
Chart prepared by James Stanley
The down-trend in Cable began to slow after the June rate decision at the Bank of England. This is when three dissenting votes were cast for an immediate rate hike out of the MPC, and GBP/USD put in a bounce off of the 38.2% Fibonacci level at 1.3117. Those three dissenting votes, however, have helped to drive higher the odds for a hike at this Thursday’s meeting, even despite the fact that inflation remains subdued from last year’s 3%-plus prints. June inflation printed at 2.4% for the third consecutive month, down from the 2.5% print in March that initially helped to reverse the bullish advance.
UK Inflation at 2.4% for Three Consecutive Months
Chart prepared by James Stanley
Beset by Brexit Risks, Slowing Inflation
The current backdrop is not an attractive one for the Bank of England to be operating in. The UK-EU Brexit showdown is due in just a couple of months, and inflation has been slowing for almost the entirety of 2018 despite the fact that the BoE have posed zero rate hikes or adjustments to policy in this calendar year. Inflation does remain above the bank’s target though, and this is giving rise to the odds that the BoE will tighten at that rate decision on the calendar for this Thursday.
This has seemed to matter little to the British Pound, however, as the pair put in a bearish test of the 1.3000 level just a week-and-a-half ago. As we wrote at the time, the prospect of selling after a bounce from a major psychological level was rather unattractive, and this led to a week’s worth of strength with the pair moving up to our target at 1.3200. This keeps the bearish trend in order, but it also complicates the prospect of executing on the expectation for bearish continuation.
GBP/USD Four-Hour Price Chart
Chart prepared by James Stanley
GBP/USD Technical Strategy
At this point, the trend remains bearish in the GBP/USD but the lack of nearby resistance makes the prospect of trading for downside continuation a bit of a challenge. More attractive for that theme could be a re-test of the bearish trend-line that can be found by connecting the June and July swing highs in the pair. This currently projects to the approximate area around 1.3070, and resistance showing here opens the possibility of anchoring stops above the 1.3293 level, or perhaps even above the 1.3363 July swing high for those that would like to give the trade more operating room.
On the bullish side of the pair: A break-above that July swing-high at 1.3363 opens the door for a re-test of the 1.3478-1.3500 zone of prior support.
GBP/USD Four-Hour Price Chart: Trend-Line Re-Test to Re-Open the Door for Bears
Chart prepared by James Stanley
IG Client Sentiment Remains Net-Long
Further contributing to the bearish bias in the pair is the fact that retail traders continue to try to call a bottom here. IG Client Sentiment is currently showing a read of 2.24-to-1 with 69.1% of retail traders holding net-long exposure in the pair. Given the contrarian nature retail sentiment, this would denote potential for bearish continuation in GBP/USD.
GBP/USD IG Client Sentiment: Retail Still Trying to Call a Bottom
Chart prepared by James Stanley
To read more:
Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.
Forex Trading Resources
DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.
If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.
--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
