UK's economic tightrope: As Cable fluctuations hint, British Pound's fate intertwines with inflation and BoE moves.
On Monday, the GBP to USD pair gained 0.01%. Following a 0.22% loss on Friday, the GBP/USD ended the day at $1.23820. The GBP/USD pair rose to a high of $1.24104 before falling to a low of $1.23700.
The GBP/USD remains at risk of further losses. On Wednesday, UK inflation figures will set the tone ahead of the BoE monetary policy decision.
Significantly, economists forecast the UK annual inflation rate to accelerate from 6.8% to 7.1% in August. An uptick in inflationary pressure would align with market bets on the BoE raising interest rates by 25 basis points on Thursday.
Higher interest rates impact the labor market, wage growth, and disposable income. A fall in disposable income would weigh on consumer spending and ease demand-driven inflationary pressure.
However, a pullback in spending would also raise the chances of a prolonged UK economic recession. UK consumption accounts for over 60% of the UK economy.
Considering the inflation-GDP dynamic, a dovish BoE rate hike will likely test GBP/USD buyer appetite. A dovish rate hike would likely consist of a 25-basis point rate hike and the suggestion of an end to the monetary policy tightening cycle.
The FOMC meeting begins today, with the markets betting on the Fed hitting the pause button on Wednesday. Recent US economic indicators suggest the US may avoid a Fed-fueled recession, leaving a final rate hike on the table.
Investors remain wary ahead of the Fed interest rate decision. Upbeat revisions to the FOMC economic projections could also ease bets on a 2024 Fed interest rate cut.
US housing sector numbers are unlikely to influence investor sentiment toward the Fed and the FOMC economic projections. However, the markets should be wary of a significant deterioration in housing sector conditions.
A deterioration in housing sector conditions would impact consumer confidence and spending intentions. A pullback in spending would ease demand-driven inflation and raise the prospects of a US recession. US private consumption accounts for over 65% of GDP.
The dollar remains in the driving seat. While the BoE may lift rates one final time on Thursday, the economic outlook looks grim. In contrast, the US economy remains robust, with the Fed likely to leave one rate hike on the table before hitting the brakes.
The GBP/USD pair sat below the 50-day and 200-day EMAs, reaffirming bearish price signals. Failure to break above the $1.24410 resistance level would support a GBP/USD fall to sub-$1.23. A return to sub-$1.23 would bring the $1.22150 support level into view.
However, a break above the $1.24410 resistance level would support a GBP/USD move to the 200-day EMA. Recessionary jitters will likely cap the upside.
The 14-period daily RSI reading of 30.11 indicates the GBP/USD pair on the border of oversold territory.
The GBP/USD remains below the 50-day and 200-day EMAs, reaffirming bearish near-term price signals. A GBP/USD break above the $1.24410 resistance level and 50-day EMA would support a GBP/USD move toward the 200-day EMA.
Selling pressure at the $1.24410 resistance level will likely intensify. The 50-day EMA is confluent with the resistance level.
However, failure to break above the resistance level and 50-day EMA would leave sub-$1.23 and the $1.22150 support level in view.
With a 35.27 reading on the 14-period 4-hourly RSI, the GBP/USD can return to $1.2350 before hitting oversold territory.
With over 20 years of experience in the finance industry, Bob has been managing regional teams across Europe and Asia and focusing on analytics across both corporate and financial institutions. Currently he is covering developments relating to the financial markets, including currencies, commodities, alternative asset classes, and global equities.