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GBP/USD: sell on rallies (video)

    By Kira Iukhtenko, FBS analyst

According to the BoE August policy minutes, 2 MPC members voted for an immediate rate hike, while other 7 voted to keep rates unchanged. Despite low wage growth, policymakers McCafferty and Weale believe that falling unemployment will finally result in acceleration of salary growth. As a result, market expectations for a premature rate hike increased. Theoretically, the news should have supported the pound.

However, this week we’ve also got some negative news for the cable. Firstly, consumer price inflation unexpectedly slowed from 1.9% to 1.6% in July, leaving the BOE more room to maintain low rates. Secondly, retail sales growth cooled to 0.1%. Despite the change in MPC votes, we don’t expect the majority to support a rate increase before Q1 2015.

It is also very important to understand that the hawkish tone of the FOMC minutes was a bigger USD-bullish surprise than the BOE minutes for GBP. The BOE rate hike is already priced in by the market. That’s why, even despite the BOE minutes, the cable extended the decline this week.

The technical picture also points to a further GBP depreciation. The $1.6550 support area (April lows) is now under immediate threat. Our next targets are $1.6460 (March low, 55-week MA) and $1.6300. Note that the market is oversold. Any dovish comments from the Fed could provoke a recovery, but the $1.6670/1.6700 area will likely cap the bullish correction. Our strategy is selling the cable on rallies.

UK economic calendar for the coming week is not so intense: watch the HPI and mortgage approvals data on Tuesday, CBI realized sales on Thursday and business investment data on Friday. 

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