Bank of England Hearing Puts the Pound at Risk of sub-$1.14

The EUR was back in the spotlight this morning. German industrial production figures drew interest ahead of the European open. Following a string of disappointing numbers, including a 27-month low composite PMI, the stats provided some relief, albeit modestly.

Industrial production declined by 0.3 in July, partially reversing a 0.8% increase in June. Economists forecast a 0.5% fall.

Later in the morning, Eurozone GDP numbers for Q2 were also of influence. In the second quarter, the Eurozone economy expanded by 0.8% versus a prelim 0.6%. Year-over-year, the economy grew by 4.1% versus a prelim 3.9% and 5.4% in Q1. Economists forecast GDP numbers of 0.6% (Q/Q) and 3.9% (Y/Y), respectively.

According to Eurostat,

• Household final consumption expenditure increased by 1.3% after stalling in the first quarter.
• Government final consumption expenditure rose by 0.6%, up from 0.2% in the previous quarter.
• Exports increased by 1.3% and imports by 1.8%.
• Employment growth slowed from 0.7% in the first quarter to 0.4% in the second quarter.
• By member state, the Netherlands (+2.6%) recorded the highest increase in GDP (Q/Q).

EUR/USD Price Action

At the time of writing, the EUR was down 0.07% to $0.98960. A choppy morning saw the EUR fall to an early low of $0.98770 before rising to a high of $0.99298.

Technical Indicators

The EUR/USD needs to move through the $0.9918 pivot to target the First Major Resistance Level (R1) at $0.9971 and the Tuesday high of $0.99864.

Following today’s stats, sentiment towards the Eurozone economic outlook will likely cap the upside ahead of tomorrow’s ECB monetary policy decision.

In the event of an extended rally, the EUR/USD pair could test the Second Major Resistance Level (R2) at $1.0040. The Third Major Resistance Level (R3) sits at $1.0163. ECB member speeches will influence.

Failure to move through the pivot would see the EUR/USD test the First Major Support Level (S1) at $0.9849.

However, barring a market flight to safety, the Second Major Support Level (S2) at $0.9795 should limit the downside. The Third Major Support Level (S3) sits at $0.9672.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The EUR/USD sits below the 50-day EMA, currently at $0.99622. The 50-day EMA slipped back from the 100-day EMA, with the 100-day EMA pulling back from the 200-day EMA to deliver bearish signals.

A EUR/USD move through the 50-day EMA ($0.99622) and R1 ($0.9971) would give the bulls a run at the 100-day EMA ($1.00114) and R2 ($1.0040).

However, a failure to move through the 50-day EMA would leave the Major Support Levels in play.

GBP/USD Price Action

At the time of writing, the Pound was down 0.28% to $1.14843. A mixed morning saw the Pound rise to an early high of $1.15233 before falling to a low of $1.14511. The Pound tested the First Major Support Level (S1) at $1.1470 early on.

It is a quiet day ahead on the economic calendar, with no economic indicators for the market to consider. However, the Bank of England was in focus, with the Treasury Select Committee hearing on the August Monetary Policy Report.

After briefly revisiting $1.16 on Tuesday, it has been downhill since, with the Pound back at sub-$1.15. Support stemming from the news of Truss becoming the new PM was short-lived.

BoE Governor Andrew Bailey and Monetary Policy Committee members provide direction. Inflation, the economic outlook, and forward guidance on interest rates were areas of interest.

Salient points from the hearing included,

• Goldman Sachs inflation projections are based on wholesale gas markets that would pass through to the CPI. Gas prices have reversed since an August peak. Huw Pill talked about how wholesale gas prices translate into retail gas prices.
• Under the new government, the impact of tax cuts and fiscal support of as much as 150 billion Pounds could push inflation higher.
• Concerns over Sterling and the Bond markets – volatility is up over the last 6 weeks, driven by extreme volatility in energy markets. Bailey welcomes fiscal support.
• Policy divergence is driving the GBP/USD with the markets getting edgy as a result of Dollar strength.
• The UK is heavily exposed to gas prices, adding to the volatility.
• The regime has not failed but needs to respond to a bigger shock. Governor Bailey talked about a likely review and the benefits but did not see the review as a look into the failings of the regime.
• The Bank is committed to addressing the energy price shock to bring inflation to target. Huw Pill talked of the Bank’s role in ensuring that fiscal policy does not drive inflation higher.
• Tradeable goods price inflation has softened.
• Contradiction between a new government wanting growth and a central bank needing to curb inflation through sizeable interest rate hikes: Need to look at growth in the longer run. Productivity growth and growth have been on a downtrend over the last 15 years. Bailey sees a recession likely and driven by the war and gas prices and not by the Bank of England.
• Catherine Mann sees short-term inflation spikes becoming more embedded, favoring more hawkish policy moves. Silvana was in favor of more modest rate hikes to bring inflation to target based on information available at the time. Silvana favored a rate hike to curb wage price growth but limit the damage to the economy.
• Huw Pill sees 10 percentage points of the 13% inflation forecast coming from direct and indirect influences of gas prices.
• Governor Bailey reiterated that the Bank of England is not going to put the UK into a recession, Vladimir Putin will.
• Bailey is concerned about price setting to protect against higher inflation.
• The Bank has flexibility on how to bring inflation back to target.
• What are the dangers of the government and the bank being out of sync? The Bank will consider any fiscal measures introduced this week.

There are no other scheduled Monetary Policy Committee member speeches to consider later in the day, leaving the GBP/USD pair in the hands of FOMC member chatter.

Technical Indicators

The Pound needs to move through the $1.1540 pivot to target the First Major Resistance Level (R1) at $1.1586 and the Tuesday high of $1.16089.

However, BoE Governor Bailey and MPC member comments failed to stop the Pound’s downward trend, leaving the Pound in the hands of market risk sentiment going into the US session.

A ‘risk on’ session, driven by any dovish FOMC member commentary, would support a run at the Second Major Resistance Level (R2) at $1.1655. The Third Major Resistance Level (R3) sits at $1.1771.

Failure to move through the pivot would leave the First Major Support Level (S1) at $1.1470 in play. In the event of an extended pullback, the GBP/USD pair would likely test the Second Major Support Level (S2) at $1.1424 and support at $1.14.

The Third Major Support Level (S3) sits at $1.1308.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The GBP/USD sits below the 50-day EMA, currently at $1.16045.

The 50-day pulled back from the 100-day EMA, with the 100-day EMA sliding back from the 200-day EMA, delivering bearish signals. A further 50-day EMA pullback from the 100-day EMA would leave the support levels in play.

However, a GBP/USD move through R1 ($1.1586) would bring the 50-day EMA ($1.16045) and R2 ($1.1655) into play.

The US Session

It is a quiet day ahead on the US economic calendar, with stats limited to trade data. However, the numbers are unlikely to move the dial. FOMC member chatter will draw interest, however.

Members Barkin and Mester will deliver speeches early in the US session, with Brainard speaking later in the day.