Chapter 44 08/17 GBPUSD: Rising Trend Possibly Emerging as Lows Continue to Ascend
Summary: The Bank of England might raise rates by 50 basis points in its September meeting, depending on the upcoming UK inflation and employment reports next month.
Fundamentals
Efforts to contain inflation in the UK are still ongoing. The latest inflation report indicates that core CPI year-on-year remains unchanged at 6.9% in July, while the month-on-month rate rose to 0.3%. The tense UK labor market has contributed to this trend.
The current position of the Bank of England is complex. On one hand, leading growth indicators such as the RICS Residential Market Survey and CBI's Expected Retail Sales suggest that domestic economic activity is deteriorating, potentially leading to a slide in inflation. On the other hand, UK inflation continues to surpass that of the G7 group and other Eurozone countries, possibly remaining above the BOE's 2% target benchmark for a while.
Strong UK wage and inflation data released on Tuesday and Wednesday suggest that the BOE needs to take further tightening measures. These data reinforce the likelihood of a rate hike in September, with the only question being whether it will be 25 or 50 basis points. Thus, the risk of re-anchoring inflation expectations remains significant. The BOE is likely to raise rates by 50 basis points in its September meeting and potentially bring the bank rate to 6% by year-end.
Refinitiv data indicates that the market currently assesses the probability of a 25 basis point rate hike by the BOE at 91%, and the probability of a 50 basis point hike at 9%.
The busy week will conclude with UK retail sales on Friday. With the focus shifting to UK consumer spending data, GBPUSD rose above 1.2780.
The market currently expects the July report to show a decline in consumer spending. Overall retail sales are projected to decline by 0.5% after growing by 0.7% in May, and core retail sales are expected to decline by 0.7% after growing by 0.8% in May. Despite elevated inflation, June's data came in higher than expected due to the push from record-breaking hot weather. Will there be any unexpected upward trend in July data? Anticipation is warranted.
Technical Analysis
The GBPUSD declined to 1.2700 during the European session before rising to a weekly high above 1.2780. Positive shifts in risk sentiment on Thursday left the U.S. dollar at a disadvantage, driving the asset to sustain its upward trajectory.
However, in the early New York session, the price encountered resistance during its climb, exposing it to the risk of a correction. This indicates that the asset has not yet broken free from the fluctuation range between 1.2700 and 1.2800, lacking the convincing momentum for further breakthroughs. Nonetheless, despite this, the continuous rise of lows and broader price signals lead us to maintain a bullish perspective. The resolute rejection at the 1.2600 low could potentially form an underlying double bottom, providing a potential foundation for the bulls to drive the GBPUSD back into the 1.3000 range. In terms of trading strategy, the focus remains on buying the dips.
Trading Recommendations
Trading Direction: Long
Entry Price: 1.2720
Target Price: 1.2963
Stop Loss: 1.2590
Valid Until: 2023-08-31 23:55:00
Support: 1.2700, 1.2671, 1.2618
Resistance: 1.2787, 1.2819, 1.2887
Trading Direction: Long
Entry Price: 1.2720
Target Price: 1.2963
Stop Loss: 1.2590
Valid Until: 2023-08-31 23:55:00
Support: 1.2700, 1.2671, 1.2618
Resistance: 1.2787, 1.2819, 1.2887
