British Pound Analysis: GBP/USD Bulls Boosted by Bets on BOE Bazooka

GBP/USD Takeaways

GBP/USD has been rallying this week on the back of strong employment and inflation data out of the UK.
Traders are pricing in an outside chance of a big 50bps rate hike from the BOE next month.
GBP/USD is approaching near-term resistance around 1.2800 ahead of tomorrow’s retail sales report.

GBP/USD Fundamental Analysis

Sometimes, it pays to go back to basics.

Central bank decisions are one of the primary drivers of currency values, and central banks the world over are focused on two main economic indicators: employment and inflation. In the case of pound sterling and the Bank of England (BOE), this week we learned that UK payrolls unexpectedly rose by 97K (with wages rising at a surprisingly hot 8.2% y/y) and CPI, a measure of consumer inflation, rose by 6.8% y/y, above expectations for a 6.7% rise.

Logically, this has impacted expectations for next month’s BOE meeting, with traders now pricing in a 100% chance of a 25bps rate hike and an outside shot (25%) of another 50bps rate hike, a proverbial “bazooka” for fighting ongoing inflation. More to the point for FX traders, this allowed the pound to remain relatively strong against the US dollar through the first half of the week, and now that the greenback is pulling back, GBP/USD has risen to test its highest levels since the start of the month.

While it’s not as significant as employment or inflation data, the next economic release for GBP/USD traders to watch will be tomorrow’s UK retail sales report for July, which is expected to show a -0.6% decline on a month-over-month basis.

British Pound Technical Analysis – GBP/USD Daily Chart

Source: TradingView, StoneX

As the chart above shows, GBP/USD went from testing key medium-term support from the combination of a 38.2% Fibonacci retracement and the rising 100-day EMA near 1.2625 at the start of the week to threatening to break out of its short-term bearish channel in today’s trade.

That past two weeks have shown a short-term resistance level in the 1.2800 zone, but if UK retail sales can outperform downbeat expectations, the pair could clear that resistance level and resume its longer-term uptrend heading into next week. Above that area, there is little in the way of resistance until the key psychological level and late July high near 1.30.

Meanwhile, a big reversal today would flip the short-term bias back to neutral, though the longer-term uptrend remains intact as long as rates hold above the key 1.2625 support area.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.