Currency pair to watch in Forex this week » GBP/USD
Given the ongoing uncertainty around BoE interventions, as well as the release of US inflation data this week, the GBP/USD pair may see some volatility in forex!
GBP/USD has been one of the most talked about pairs over the past month. When Chancellor Kwasi Kwarteng announced plans for Prime Minister Trouss’s new “mini-budget” scheme, markets began to worry about where the money would come from to finance it. The Bank of England was slowly raising interest rates, and investors feared that the government would now have to borrow money at much higher rates.
As a result, pigs and the great British pound collapsed. A few days later, the Bank of England intervened in the gold market, pushing up the yield on the pound. The central bank said it would continue to intervene in the market if necessary, buying up to £5bn a day until October 14 to maintain liquidity in the markets.
On Monday, the Bank of England provided an update on how it will continue to address issues beyond October 14. The central bank said it would increase the number of pigs it buys per day until 14 October from £5bn to £10bn. (So far, the Bank of England has only bought £4.6bn worth of pigs out of the £40bn it says it could buy.)
In addition, the Bank of England launched a long-term credit facility through mid-November to allow banks to ease liquidity pressures on liability funds. This was done to ensure that these funds have the necessary liquidity to close certain positions over the next few weeks. The Bank of England will meet again on 3 November.
In addition, the UK is releasing a plethora of data this week, including August GDP, trade balance, industrial production, and economic output. However, the most important data this week from the UK will be the data on the number of applicants for September. 10,000 new claimants are expected to be added to unemployment benefits, up from 6,300 in August. August was the first increase since February 2021.
Retreating from 20-year highs, the US dollar has regained its strength in forex. The number of non-farm payrolls (NFP) in the US was in line with expectations at +263,000. In addition, the unemployment rate fell from 3.7% to 3.5%. The employment data alone should give the Fed confidence that it will rise by 75 basis points at its Nov. 2 meeting. The US is to release inflation data this week. Michigan’s PPI, CPI and CPI components will be released this week. The overall consumer price index is expected to fall from 8.3% y/y to 8.1% y/y.
However, the core consumer price index is expected to rise to 6.5% year on year from 6.3% year on year. If the data turns out to be stronger than expected, watch the US dollar continue to rise as the chances of a 75 basis point gain in the next meeting increase. If inflation is much higher, traders may even start raising prices by 100 basis points!
GBP/USD started to move down aggressively in a down channel after the pair broke below 1.3000 on April 22. On September 21, the price of the GBP/USD pair broke through the lower trend line of the channel. However, it wasn’t until September 23 that the pair aggressively broke through the bottom of the channel.
On Monday, September 26, the GBP/USD pair traded in forex at a low of 1.0357 as the Bank of England intervened in the securities market and the GBP rose. Over the next 6 days, the GBP/USD bounced from the 61.8% Fibonacci retracement level from the August 10 high to the September 26 low near 1.1495. Since then, the pair has fallen again.
GBP/USD daily chart
Source: Tradingview, Stone X
On the 4-hour chart, the GBP/USD has pulled back to the 38.2% Fibonacci retracement level from the Sept. 26 lows to the Oct. 5 highs near 1.1054. Below, the pair could trade towards horizontal support and the 50% retracement level from the same time frame around 1.0918/1.0931 and then the 61.8% Fibonacci retracement at 1.0782. If the pair bounces higher, the first horizontal resistance will be at 1.1226 and then the highs from October 5 at 1.1495. Above this level, the price of GBP/USD may reach a high on September 22 at 1.1738.
GBP/USD 4-hour chart
Source: Tradingview, Stone X
Due to the continued uncertainty regarding the interventions of the Bank of England, as well as the publication of data on inflation in the US this week, the GBP/USD pair may face some volatility in the foreign exchange market. Watch the pigs to see if they reach new heights. If so, the Bank of England could intervene again and the pound could fall. Also, if the US CPI data is stronger, the US dollar may rise, which could lead to a decline in the GBP/USD pair!
Joe Perry, CMT, FOREX.com » Official site
Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not warrant its accuracy or completeness and shall not be liable for any direct, indirect or consequential damages that may result from anyone relying on such information.