GBP/USD: Big risk for sterling bulls is dovish hike in November
Macroeconomic overview:
- New Bank of England Deputy Governor Dave Ramsden said today he was in no hurry to vote for an interest rate hike because he saw little sign of inflation pressure building in Britain's labour market.
- New Bank of England rate-setter Silvana Tenreyro said she was not ready to vote to raise the BoE's record low interest rates in November although she might do so in the coming months if inflation pressure builds in Britain's labour market.
- The BoE surprised investors last month when it said most of its rate-setters expected to increase borrowing costs "in the coming months", even though Britain's economy is growing more slowly than other European economies and uncertainties about Brexit are mounting.
- But Ramsden said he was not part of the majority, which included BoE Governor Mark Carney. Financial markets have betted on a first hike as soon as November 2, at the end of the BoE's next policy meeting.
- The BoE believes that Britain's departure from the European Union will mean the economy will not be able to grow as quickly as before without generating excessive inflation because of lower migration and weaker investment by companies.
- Britain's inflation rate hit 3% in September, above the BoE's 2% target, data published today showed. The reading was in line with market expectations. Rising inflation - driven largely by the pound's fall since last year's vote to leave the European Union - has squeezed household incomes, causing broader economic growth to slow. Core consumer price inflation, which strips out changes in the typically volatile prices of energy, food, alcohol and tobacco, was steady at 2.7%, as expected.
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Technical analysis and trading signals:
- Weak GBP/USD close on Monday and today’s short-lived reaction to UK inflation data suggests the short-term outlook is bearish. The Monday’s low at 1.3225 is the first support level.
- We think that the downside move will be limited and the pair will probably not break below October 6 low at 1.3027 as the BoE is preparing for a hike in November. The biggest risk for sterling bulls besides an unchanged policy shock on November 2 is if the BoE delivers a "dovish hike" (the USD eased after the Fed's "dovish hike" in March). A "dovish hike" could prompt GBP bulls to close longs established in the hope that the BoE will follow its forecast hike with another one or two more in 2018.
- We stay sideways now as in our opinion no position is justified from risk/reward perspective.
Source: GrowthAces.com - your daily forex trading strategies