Analysis of GBP/USD (May 3, 2024)

Create at 6 months ago (May 03, 2024 11:08)

BoE Faces Dilemma Amid Central Bank Divergence; Fed Holds Rates

The BoE finds itself in a policy dilemma between the ECB, likely to cut rates by mid-year, and the U.S. Federal Reserve, where easing might not occur in 2024, leaving the BoE in a middle ground. Financial markets initially priced all three major central banks for rate cuts in tandem this summer, but recent discrepancies in timelines have emerged, leaving room for uncertainty.

Market expectations lean towards a BoE rate cut by August, with a possibility of a move as early as June and potentially slash its policy rate by up to 75 basis points by year-end. However, divergence exists in year-end rate forecasts among the central banks. Concerns persist regarding the slack in Britain's labor market necessary to keep inflation at target levels.

Recent statements from top BoE officials, Governor Andrew Bailey and Deputy Governor Dave Ramsden, suggest that British inflation is tracking as expected by the central bank and paving the way for a rate cut. Although inflation surpassed the BoE's 2.0% target in March, it was lower than the previous month's reading.

In March, UK consumer price inflation dipped to 3.2% from February's 3.4%, while unemployment reached 4.2%, marking a six-month high. Wage growth remained robust at 6.0%, double the pace. BoE member Haskel noted slow progress in reducing labor market tightness, raising concerns about inflation control.

British businesses saw their fastest growth in nearly a year, but faced heightened costs due to increased wages and prices for transport and raw materials. Government borrowing exceeded expectations in the 2023/24 financial year, posing challenges for Prime Minister Rishi Sunak's tax cut plans ahead of an election. Meanwhile, British house prices fell unexpectedly for a second consecutive month, contrasting with optimism among manufacturers, despite a drop in orders.

Meanwhile, the U.S. Federal Reserve opted to keep interest rates unchanged, signaling a continued inclination toward eventual rate cuts but expressing concern over recent disappointing inflation figures, which might delay rate adjustments. Fed Chair Jerome Powell stated that achieving the targeted decline in inflation to 2% might take longer than previously anticipated. Despite acknowledging inflationary pressures, Powell indicated a reluctance to raise rates immediately, preferring to wait for clearer signs of economic pressure on inflation. However, uncertainty looms over whether rate cuts will materialize this year.

Following Powell's remarks, the U.S. dollar weakened from its recent highs, although Barclays predicts the possibility of further dollar appreciation. While previous market dynamics resembling those of October 2023 could lead to a dollar sell-off, Barclays notes differences, such as higher and accelerating U.S. inflation levels, which could impact the outcome.

The slowing productivity growth in the U.S. during the first quarter poses a challenge to the Federal Reserve's strategy to combat inflation without causing a significant increase in unemployment. Despite a surge in labor costs and stagnating productivity, analysts remain cautiously optimistic about the economy's trajectory, attributing the slowdown to seasonal factors and maintaining hopes for a "soft landing" scenario regarding inflation.

The recent private sector job growth in April surpassed expectations while labor costs surged in the first quarter, reflecting a rise in wages and benefits that aligns with earlier inflation concerns, potentially delaying anticipated interest rate cuts. Although there are signs of easing labor market conditions, such as fewer job openings and quits, the overall labor market remains fairly tight, supporting economic growth in the second quarter. However, concerns persist regarding inflationary pressures and squeezed profit margins due to rising labor costs.

However, consumer confidence in the U.S. declined in April amid worries about labor market conditions and income, while manufacturing activity contracted in April, accompanied by a notable increase in factory input prices. The slowdown in productivity growth, coupled with a surge in labor costs, highlights the delicate balance policymakers face in managing inflation without stifling economic growth.

Despite a slight narrowing of the U.S. trade deficit in March, the economy continues to grapple with trade challenges, including a decline in exports and unexpected drops in construction spending, likely influenced by rising mortgage rates. Hence, it's anticipated that the GBP/USD currency pair will likely maintain stability, fluctuating within the current range due to similar rates of return in the two economies. Although the pound could see a slight strengthening in the near term, yet any medium-term appreciation is expected to be constrained.

Data for Technical Analysis (1H) CFD GBP/USD

Resistance : 1.2555, 1.2557, 1.2559

Support : 1.2549, 1.2547, 1.2545

1H Outlook

Analysis of GBP/USD Source: TradingView

Buy/Long 1 If the support at the price range 1.2544 - 1.2549 is touched, but the support at 1.2549 cannot be broken, the TP may be set around 1.2555 and the SL around 1.2542, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2555 - 1.2560, TP may be set around 1.2564 and SL around 1.2547, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2555 - 1.2560 is touched, but the resistance 1.2555 cannot be broken, the TP may be set around 1.2547 and the SL around 1.2562, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2544 - 1.2549, TP may be set around 1.2538 and SL around 1.2557, or up to the risk appetite.       

Pivot Points May 3, 2024 03:22AM GMT

Name
S3
S2
S1
Pivot Points
R1
R2
R3
Classic 1.254 1.2545 1.2547 1.2552 1.2554 1.2559 1.2562
Fibonacci 1.2545 1.2547 1.2549 1.2552 1.2555 1.2557 1.2559
Camarilla 1.2548 1.2549 1.255 1.2552 1.2551 1.2552 1.2553
Woodie's 1.254 1.2545 1.2547 1.2552 1.2554 1.2559 1.2562
DeMark's - - 1.2547 1.2552 1.2554 - -

Sources: Investing 1Investing 2

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