Chapter 11 06/07 GBPUSD: Go Short at the Highs as the Foundation for Further Rise Is Not Solid
Abstract: Data released last week showed that the core inflation rate in the UK unexpectedly accelerated to 6.8% in April, prompting the market to raise expectations for the Bank of England to raise interest rates.
Fundamentals
After the data showed that the core inflation in the UK unexpectedly accelerated in April, investors bet that the Bank of England (BOE) would raise interest rates very aggressively, but the GBP seems to be easily affected by the expected weakening.
Judging from the trend of the UK forward overnight-index swap curve, the UK will raise interest rates by a full 50 basis points before August and nearly 100 basis points before November. If the BOE's new round of tightening policy is not as strong as the market currently expects, the GBP still faces the risk that the BOE's interest rate expectation will be re-priced. If signs continue to show that the inflation problem in the UK is more serious than that in the U.S. and the eurozone, the GBP may experience a period of poor performance.
The BOE may continue to raise interest rates in June and August to curb inflation, but long-term interest rates should fall in the second half of the year, as investors' concerns shift from high inflation to weak economic growth. Weak credit demand, early signs of weak employment, and a sharp drop in energy prices will all help shift the focus.
At present, the inflation-adjusted real rate of return in the UK has risen, and the GBP has been boosted, but this situation may change. As the UK's core inflation development begins to differ from other major economies, the GBP should be very sensitive to the re-downward pricing of the UK's real rate of return. The short-term risk-return ratio of the GBP tends to go down.
Technical Analysis
The GBPUSD rebounded from 1.2370 in the 1H timeframe and is currently trading above 1.2400.
It not only tested the resistance of 1.2440 and kept it above the 50-hour SMA. However, to start a new rally, the GBPUSD bulls must be cleared and kept stable above the resistance zone of 1.2440 and may continue to stay for a longer period.
It is also worth mentioning that the Relative Strength Index (RSI) in the 4H timeframe rose slightly, reflecting the bullish tendency in the short-term market outlook.
However, we are not optimistic about the asset price moving up further, because the period after the price hit the level of 1.2545 on June 2 and retreated sharply is too crowded, and the foundation for continuing to rise in the short term is not solid, and the path with the least risk is downward, which is also in line with the Theory of Mean Reversion. It is recommended to go short at the highs.
Trading Recommendations
Trading direction: Short
Entry price: 1.2465
Target price: 1.2338
Stop loss: 1.2560
Deadline: 2022-06-21 23:55:00
Support: 1.2439, 1.2392, 1.2367
Resistance: 1.2460, 1.2483, 1.2545
