BOE Signals Stir Rate Speculation

Thursday witnessed a mixture of performance outcomes for the GBP. The exchange rate between the Pound and the US Dollar (GBP/USD) experienced a decline in its strength during the trading session due to a surge in the US core PCE price index. This abrupt increase served as a catalyst for renewed predictions of impending interest rate hikes in the US.

These occurrences were, to some extent, influenced by a speech delivered by Huw Pill, who holds the position of Chief Economist at the Bank of England (BoE). In his address, Pill reiterated the BoE's unwavering commitment to lowering inflation to the designated 2% threshold. He also implied that there was a slim likelihood of interest rate reductions occurring in the near future. However, he subtly suggested that the BoE might be reaching the conclusion of its ongoing phase of tightening monetary policy. As a result, this led investors to engage in speculation, conjecturing that the expected rate increase in September might mark the conclusion of this particular cycle.

Nevertheless, Pill stressed the importance of achieving a sustained return to the targeted inflation rate. This was accompanied by a recognition of the potential risks associated with excessive rate hikes, which could potentially hinder both economic growth and employment opportunities.

The impact of these developments was compounded by the results of a survey conducted by Lloyds Bank. This survey unveiled an escalation in business confidence as the prospect of interest rate peaks loomed on the horizon.

British companies displayed high confidence levels, planning to raise prices and staff wages, causing concern for the BoE regarding inflation. The survey showed strong hiring intentions and a notable share of firms predicting a 3% pay increase.

On the other hand, a different set of data revealed a significant 16% drop in home sales within the UK during the month of July, as compared to the preceding year. Moreover, the projection from property website Zoopla anticipated a considerable 21% reduction in house acquisitions for the ongoing year, attributed to the rising expenses linked with borrowing. Average house prices in May were down 2% from their peak in September but still over 20% higher than pre-pandemic levels, attributed to low interest rates and increased demand for spacious homes.

In the US, the Dollar strengthened by 1.69% over the month against various currencies, while consumer spending rose by 0.8% in July. Despite this, a decrease in inflation growth hinted that the Federal Reserve would likely maintain current interest rates next month. Nonetheless, the PCE price indices, favored by the Fed for gauging inflation, showed an increase, causing annual inflation to accelerate. Simultaneously, US ADP data indicated a rise in private-sector payrolls for August, although wage growth slowed and unexpected drops in jobless claims suggested reduced recession risks. JPMorgan revised its GDP estimate for Q3 2023 upward due to robust consumer spending.

Market expectations leaned towards the Federal Reserve keeping rates unchanged in September, with a probability of a hike in November. Consumer spending's current pace is likely unsustainable, as households draw down pandemic-acquired savings and upcoming student debt repayments could limit credit card use. Consequently, the pound's upward movement is anticipated to remain unhindered, given the enduring strength of economic data in both nations and the relatively minor disparity in yields. This could serve as a catalyst for the pound to experience some degree of upward momentum.

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

Resistance : 1.2675, 1.2679, 1.2687

Support : 1.2659, 1.2655, 1.2647                      

5H Outlook

Source: Investing.com          

Buy/Long 1 If the support at the price range 1.2639 - 1.2659 is touched, but the support at 1.2659 cannot be broken, the TP may be set around 1.2676 and the SL around 1.2629, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2675 - 1.2695, TP may be set around 1.2723 and SL around 1.2649, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2675 - 1.2695 is touched, but the resistance 1.2675 cannot be broken, the TP may be set around 1.2656 and the SL around 1.2705, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2639 - 1.2659, TP may be set around 1.2630 and SL around 1.2685, or up to the risk appetite.       

Pivot Points Sep 01, 2023 02:59AM GMT

Sources: Investing 1, Investing 2