POUND STERLING ANALYSIS & TALKING POINTS

• UK CPI throws a spanner in the works.
• BoE could go either way tomorrow.
• May swing low under threat at 1.2308.

GBPUSD FUNDAMENTAL BACKDROP

The British pound is setting up for the Bank of England (BoE) interest rate announcement on Thursday (see economic calendar below). The build up to this particular risk event has been a rollercoaster for the UK economy with inflation picking up and market pricing ramping up hawkish bets. Since then, this has been drastically reduced to roughly 22bps (refer to table below) of additional rate hikes in early 2024. While expectations were firmly in favor of another 25bps hike right up until Wednesday morning, UK CPI showed softening inflationary pressures leading to market pricing significantly shifting where preference falls towards a rate pause. With tomorrow’s decision a literal coin toss, pound traders will be on edge.

BANK OF ENGLAND INTEREST RATE PROBABILITIES

Source: Refinitiv

Recent escalations in rental prices have reached levels last seen in 10 years and will contribute to inflationary pressures should this trend continue. Prior to this information BoE guidance has been slightly more dovish than a few months ago as BoE Governor Andrew Bailey made hints that the cycle is near or nearing its peak. Couple that with the PPI input and output upside surprises, the UK may experiences knock-on effects down the line.

From a voting standpoint, the BoE rate announcement may be far more divided than the previous split shown below. UK Chancellor Hunt went on to reiterate the importance of bringing down inflation this morning with the following statements:

“Inflation is still too high.”

“It’s all the more important to stick to our plan to halve inflation.”

With this in mind, the BoE may well maintain prior market forecasts and hike rates by 25bps.

UK ECONOMIC CALENDAR (GMT +02:00)

Source: DailyFX Economic Calendar

POSSIBLE MARKET REACTIONS

TECHNICAL ANALYSIS

GBP/USD DAILY CHART

Chart prepared by Warren Venketas, IG

Price action on the daily cable chart is trading securely below the 200-day moving average (blue) and although a hike may prop up the currency, a dovish slant to the BoE’s messaging could keep the pound suppressed. GBP/USD now enters oversold territory but does not rule out further downside to come.

Key resistance levels:

• 1.2548
• 1.2500
• 200-day moving average (blue)

Key support levels:

• 1.2308
• 1.2000

BEARISH IG CLIENT SENTIMENT (GBP/USD)

IG Client Sentiment Data (IGCS) shows retail traders are currently net LONG on GBP/USD with 67% of traders holding long positions (as of this writing).

Download the latest sentiment guide (below) to see how daily and weekly positional changes affect GBP/USD sentiment and outlook!

Contact and followWarrenon Twitter:@WVenketas