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Sterling: Next In Line For A Rate Hike?

Published 07/12/2015, 11:35 AM
Updated 07/09/2023, 06:32 AM

As many traders await the US Federal Reserve to hike the funds rate for the first time, smart money noticeably already moved to the next candidate on the same interest rate hike speculation - The British pound sterling.

Federal Open Market Committee of the US Federal Reserve, in its latest meeting minutes, did not offer any clue as to the timing of the interest rate hike, and with the IMF issuing a statement of advice for the Feds to delay its planned rate hike recently, we are keen to believe more so in a delay than a September rate hike.

Furthermore, with recent soft NFP data that saw a reduction in jobs being added to the US economy, coupled with increasing unemployment claims lately, the IMF is more likely to be followed than not. Nevertheless, we still do not negate the September rate hike, as the Feds could raise rates just to show they can.

On the other hand, our British counterpart continually shows improvements in their economic activities, with rising GDP, better than expected services and construction PMIs, housing index and retail sales. What has brought the sterling down in the last 3 weeks is, we believe, more the peripheral effects of the Eurozone crisis, given the fact that Europe is the UK's biggest trading partner, as reflected in the weak manufacturing PMI.

Nevertheless, the sense of Bank of England, speculated to raise the UK interest rate for the first time since the economic crisis as early as the first quarter of next year, is more enthralling to the market than anything, as we can see in the chart below.
GBP/USD Chart

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From a weekly standpoint, we can clearly see a reversal pattern, an inverse head and shoulder has already been completed. Now the GBP/USD exchange rate is returning to the neckline to pick up remaining buy orders. As there are more willing suppliers than buyers to exchange at a lower rate, we see price dip in the last three weeks. This potentially forms the next swing low on the daily, if there are not enough sellers who are willing to continuously sell at current rate, around $1.5450, at this time. Interested buyers have to bid further up; hence, a reversal is imminent.

Fundamentally, UK Inflation data next week, MPC votes and UK retail sales in the week after, and UK GDP data by end of this month should offer us some clues as to whether we will see a reversal and uptrend continuation or a deeper price dip. Technically, a reversal candlesticks pattern, like a hammer, morning star, or 3 white soldiers, on the daily and/or weekly is preferred before we decide to go long.

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