GBP Volatility Amid Interest Rate Surge

A report published on Monday by the Resolution Foundation revealed that the increase in interest rates in Britain has resulted in a loss of over 2 trillion pounds in household wealth over the past year. This decline can be attributed to the decrease in house prices and the devaluation of bonds, which has had a significant impact on pensions.

In 2021, household wealth had reached a record high of 17.5 trillion pounds, but the recent surge in interest rates has caused a sharp drop, making it the largest decline in wealth as a percentage of gross domestic product (GDP) since World War Two. The wealth-to-GDP ratio fell from 840% to 650% by early 2023.

Government figures also released on Tuesday indicated that England and Wales are heading towards the highest number of company insolvencies in a quarter since early 2009. This trend can be attributed to businesses struggling to repay loans obtained during the COVID-19 pandemic, amid challenging economic conditions.

In June, 2,163 companies were declared insolvent, representing a 27% increase compared to the previous year. Although this figure was slightly lower than May's record high which marked the highest number since monthly records began in January 2019, the cumulative total for the three months ending in June was 6,403. If confirmed in the official quarterly report later this month, this would be the highest non-seasonally-adjusted figure for a calendar quarter since Q1 2009. Despite these figures, RSM UK Restructuring Advisory expects insolvencies to decrease by more than 10% by the end of the year, even with the projected increase in Bank of England interest rates.

The housing market in Britain showed signs of a slowdown in June. Property surveyors anticipate continued sluggishness in activity due to higher borrowing costs dampening new buyer enquiries. The housing market is facing pressure from weakened buyer demand, declining house prices, rising mortgage rates, and the Bank of England's efforts to combat persistent inflation. Two-year fixed mortgage rates have reached a 15-year peak.

Financial markets predict that the Bank of England, which has consistently raised interest rates since December 2021, will further increase its Bank Rate to 6.25% by the end of this year, up from the current rate of 5%.

On Tuesday, the U.S. dollar rebounded from a 15-month low against a basket of currencies following robust core retail sales figures for June. Investors are eagerly awaiting the Federal Reserve's upcoming interest rate decision. Although headline U.S. retail sales saw a modest 0.2% increase in June, falling short of expectations, core sales, which exclude automobiles, gasoline, building materials, and food services, showed greater resilience with a 0.6% increase.

Additionally, recent data showed an unexpected decline in production at U.S. factories in June; however, there was a rebound in the second quarter, driven by increased motor vehicle output following two consecutive quarterly declines.

Fed funds futures traders are factoring in a further tightening of 33 basis points this year, with the benchmark rate expected to peak at 5.40% in November. Consequently, there is an anticipation that the British pound will experience fluctuations within a specific range and exhibit strength than the US dollar in this timeframe. However, the definitive direction of this trend relies heavily on the inflation data published by both nations.

Data for Technical Analysis (5H) CFD GBP/USD

Resistance : 1.3041, 1.3046, 1.3053

Support : 1.3027, 1.3022, 1.3015              

5H Outlook

Source: Investing.com                                   

Buy/Long 1 If the support at the price range 1.3022 - 1.3027 is touched, but the support at 1.3027 cannot be broken, the TP may be set around 1.3042 and the SL around 1.3018, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3041 - 1.3046, TP may be set around 1.3055 and SL around 1.3023, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3041 - 1.3046 is touched, but the resistance 1.3041 cannot be broken, the TP may be set around 1.3023 and the SL around 1.3050, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3022 - 1.3027, TP may be set around 1.3011 and SL around 1.3045, or up to the risk appetite.       

Pivot Points Jul 19, 2023 02:39AM GMT

Sources: Investing 1, Investing 2