BoE Likely to Hold Rates at 5%, Eyes on QT and Economic Signals

The Bank of England (BoE) is expected to keep interest rates at 5% at its next meeting, though there is a slim chance of a rate cut. Investors are focusing on the September meeting for signals about future rate changes and the BoE's bond sale strategy, a topic that has political implications. Mixed economic signals include slowing wage growth and stagnant economic activity in July, though inflation remains above target.

The decision on the pace of the BoE’s quantitative tightening (QT) is eagerly awaited. The QT program, which reduces the bank's holdings of government bonds, has faced criticism due to its impact on taxpayer-funded losses. However, it might accelerate, with economists predicting an increase from £100 billion to £115-120 billion in the annual runoff of government bonds.

British Prime Minister Keir Starmer’s upcoming budget will aim to balance growth with fiscal responsibility, addressing a £22 billion deficit. He emphasized that growth-driven policies will be prioritized, warning against unfunded spending commitments. In the labor market, cooling wage growth could support further interest rate cuts by the BoE later this year, though these are expected in November.

Businesses are concerned about stricter labor laws introduced by the Labour government, fearing they may increase the risk of hiring. Despite this, manufacturers are optimistic about future economic prospects, with confidence bolstered by a more stable political environment.

The shift towards a services-dominated economy continues, with manufacturing's contribution to the UK's GDP hitting a record low. Meanwhile, the UK housing market shows signs of recovery, driven by an interest rate cut and political stability. However, affordability concerns remain a challenge despite lower borrowing costs.

The U.S. dollar strengthened on Wednesday following stronger-than-expected retail sales data, which led traders to reduce bets on a large interest rate cut by the Federal Reserve. The Fed is anticipated to announce its first rate cut in over four years, with markets expecting a 50-basis-point reduction.

U.S. retail sales in August increased by 0.1%, defying expectations of a 0.2% decline, which prompted the Atlanta Fed to revise its GDP growth forecast for the third quarter from 2.5% to 3%.

Other economic indicators, such as rising business inventories and a rebound in factory output, also support the notion that the Fed may take a more cautious approach to rate cuts. Inventory investment, a significant GDP component, increased more than expected, suggesting potential growth contributions for the third quarter, even as businesses stock up in anticipation of higher tariffs. Therefore, it may result in the GBP/USD pair being expected to trade in the current range and to the lower range a little more during this period.

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

Resistance : 1.3168, 1.3170, 1.3173

Support : 1.3162, 1.3160, 1.3157  

1H Outlook 

Source: TradingView

Buy/Long 1 If the support at the price range 1.3152 - 1.3162 is touched, but the support at 1.3162 cannot be broken, the TP may be set around 1.3169 and the SL around 1.3147, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3168 - 1.3178, TP may be set around 1.3182 and SL around 1.3157, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3168 - 1.3178 is touched, but the resistance 1.3168 cannot be broken, the TP may be set around 1.3161 and the SL around 1.3183, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3152 - 1.3162, TP may be set around 1.3148 and SL around 1.3173, or up to the risk appetite.       

Pivot Points Sep 18, 2024 03:04AM GMT