GBP/USD Upbeat after Friday’s Hot US PCE Inflation & Ahead of this Week’s BoE Rate Decision

  • GBPUSD
    (${instrument.percentChange}%)

Lower Fed Expectations

The Federal Reserve delivered a back-to-back 0.75% rate increase last week, but unlike previous times, it refrained from offering forward guidance in regards to the upcoming meeting in September, opting for a meeting-by-meeting and data dependent approach.

Chair Powell however, said that it "likely will become appropriate to slow the pace of increases" [1], as rates now stand at neutral levels of 2.25%-2.5% and come closer to the bank's target for this year. Furthermore, officials need to take into account the adverse effect on the economy, since US GDP contracted for second straight quarter, despite their defiant rhetoric.

Given these factors, the Fed may become less aggressive onwards, while market expectations around its next moves have lowered. At the time of writing, CME's FedWatch Tool projects an 0.5% hike in September and 0.25% in November, both with above-60% probabilities. [2]

Bringing down inflation though, remains the bank's top priority, and the data don't allow yet for much divergence from the aggressive tightening path at this stage, which has fueled the US Dollar's rise. Friday's data showed that headline Personal Consumer expenditures accelerated to the highest level since 1982 in June, at 6.8% y/y (from 6.3% prior).

BoE in the Spotlight

Focus this week will shift to the Bank of England, which hands down its monetary policy decision on Thursday, along with the updated economic projections. The BOE, begun its rate hike cycle way before the Fed back in December, but has been limited to moves of no-more than 25 basis points.

Governor Bailey recently mentioned that a larger 0.5% increase is "among the choices on the table" for the upcoming, creating some expectations for a break with convention, although he warned that this is "not locked in" [3]. However, the central bank is known for communication snafus and does not have the best track record when it comes to providing guidance around its intentions.

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Similar to the Fed, the Bank of England is troubled by sky high inflation, which it expects to exceed 11% later in the year [4], so we will also be looking forward to the updated projections.

GBP/USD Analysis

Given the Fed's less aggressive stance and lower expectations, along with the possibility of bigger hike by the BoE, the pair has staged a two-week recovery, reacting from July's 2+ year lows.

Today it stays on the front foot and tries to enter into the daily Ichimoku Cloud, which coul bring 1.2400 in its croshairs, although a catalyst will likely be required for challenfing it and moving towards and beyond 1.2500.

Despite the recent ascend that has put immediate risk on the upside, GBP/USD is not out of the woods yet and we could see a return below the critical EMA200, although a decline to 1.1932 has a higher degree of difficulty in the near-term.

The pair's trajectory will be determined the BoE's decision on Thursday, which has the potential to produce outsized moves and spur volatility.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 01 Aug 2022 https://www.federalreserve.gov/monetarypolicy/fomcpresconf20220727.htm

2

Retrieved 01 Aug 2022 https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html#

3

Retrieved 01 Aug 2022 https://www.bankofengland.co.uk/speech/2022/july/andrew-bailey-speech-at-mansion-house-financial-and-professional-services-dinner

4

Retrieved 14 Aug 2022 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/june-2022

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