GBPUSD: My 4 scenarios for this week
Updated
These are just my ideas, what I’m expecting, and why, with this week’s the big fundamentals.
Overview
Big market-moving news this week with Wednesday’s UK CPI, Thursday’s BoE Interest Rate Decision and Forecast, there is also FED Powell’s testimony in between the UK events on Wednesday.
Several things could play out with the UK news, which is what my scenarios are based on. I’m expecting Powell to be hawkish because even though it’s clear that the US is on top of inflation, they are still double their target and thanks to their economic performance they have room to keep tightening and can still avoid recession, imho.
The BoE on the other hand have a massive predicament. Inflation is out of control, far worse than the other G7 economies. Interest rate rises are squeezing the economy, UK mortgage rates are now hitting 6%. In my opinion another 1.25% interest rates will cause recession. The BoE moved too slow and are behind inflation, they have to keep hiking to do anything about it, but there will be a tipping point where the market sees this as a negative for the GBP.
UK Inflation / Interest Rates
BoE have consistently under-estimated inflation through this period. This time their forecast is higher than the previous month forecast (8.5% compared to 8.3% previous, inflation fell to 8.7% last time so I think they’ve been more realistic with their prediction this time). If inflation is coming down (I think it is), then we could see a better than forecast reduction (red), which could be bad for GBPUSD.
If it comes in lower (red) then it’s ‘more’ likely there’ll be a 0.25% rate hike, this is priced in, and I think this will cause GU to fall. If BoE are brave enough to go with the 0.5% outside prediction, then this could cause GU to rise.
If Wednesday’s CPI number shows inflation is above predication (green) (and likely to be rising as it was 8,.7% last time and the predication this time is 8.5%), then this further demonstrates that the BoE have been way off the mark in controlling it compared to the rest of the G7, which is not good. I do think short term this will be positive for GU, but only for banks making money, it’s terrible for the UK economy and the BoE. If it is green and BoE only raise rates by 0.25% then I think this may send GU down as it’s a further demonstration of their ineptitude. If they do go with the 0.5% hike in this scenario, then this could send sterling higher in the short term.
Either way and in each scenario, I think GU will struggle to get beyond 1.29 in this visit based on long term dynamic trendline, overall down-trend, a bubble of a credit based economy, better performing US economy and the US being the global currency (and expecting China performance below expectations), etc etc, and breathe….
Also, in technical news, I’m also seeing some divergence on the RSI, and GU is overbought.
My Scenarios
Here’s my scenarios on the chart, end of today I’m expecting to be around the 1.27 level on the chart based on retracement from Friday’s high and DXY having some room to move up to resistance (around 1.03), but let’s see what happens today and I'll review this again this evening.
1. Red CPI / 0.25% Hike
This is an inflation figure that comes in below the 8.5% prediction and the BoE raising rates by 0.25%.
This is what I think will happen and it will mean reversal.
2. Red CPI / 0.5% Hike
This is an inflation figure that comes in below the 8.5% prediction and the BoE raising rates by 0.5%.
This is what should happen if the BoE are brave enough, but I think it will worry markets about recession.
3. Green CPI / 0.25% Hike
This is an inflation figure that comes in above the 8.5% prediction and the BoE raising rates by 0.25%.
This is a terrible situation, inflation going up and the BoE still not having the balls to make up for lost time and tackle it head on.
4. Green CPI / 0.5% Hike
This is an inflation figure that comes in above the 8.5% prediction and the BoE raising rates by 0.5%.
In this scenario this is what I believe the BoE should do, it will likely cause GU to go up, but as I’ve said I personally think topside is limited by the prevailing downtrend. In this scenario there will be growing fears of a recession, change of government will be pretty much a given, so overall I still think this will be bad for GU in the medium term.
These are just my thoughts as we go into the next few days.
Interested to hear your comments so I can keep learning and adjusting my thinking!
Overview
Big market-moving news this week with Wednesday’s UK CPI, Thursday’s BoE Interest Rate Decision and Forecast, there is also FED Powell’s testimony in between the UK events on Wednesday.
Several things could play out with the UK news, which is what my scenarios are based on. I’m expecting Powell to be hawkish because even though it’s clear that the US is on top of inflation, they are still double their target and thanks to their economic performance they have room to keep tightening and can still avoid recession, imho.
The BoE on the other hand have a massive predicament. Inflation is out of control, far worse than the other G7 economies. Interest rate rises are squeezing the economy, UK mortgage rates are now hitting 6%. In my opinion another 1.25% interest rates will cause recession. The BoE moved too slow and are behind inflation, they have to keep hiking to do anything about it, but there will be a tipping point where the market sees this as a negative for the GBP.
UK Inflation / Interest Rates
BoE have consistently under-estimated inflation through this period. This time their forecast is higher than the previous month forecast (8.5% compared to 8.3% previous, inflation fell to 8.7% last time so I think they’ve been more realistic with their prediction this time). If inflation is coming down (I think it is), then we could see a better than forecast reduction (red), which could be bad for GBPUSD.
If it comes in lower (red) then it’s ‘more’ likely there’ll be a 0.25% rate hike, this is priced in, and I think this will cause GU to fall. If BoE are brave enough to go with the 0.5% outside prediction, then this could cause GU to rise.
If Wednesday’s CPI number shows inflation is above predication (green) (and likely to be rising as it was 8,.7% last time and the predication this time is 8.5%), then this further demonstrates that the BoE have been way off the mark in controlling it compared to the rest of the G7, which is not good. I do think short term this will be positive for GU, but only for banks making money, it’s terrible for the UK economy and the BoE. If it is green and BoE only raise rates by 0.25% then I think this may send GU down as it’s a further demonstration of their ineptitude. If they do go with the 0.5% hike in this scenario, then this could send sterling higher in the short term.
Either way and in each scenario, I think GU will struggle to get beyond 1.29 in this visit based on long term dynamic trendline, overall down-trend, a bubble of a credit based economy, better performing US economy and the US being the global currency (and expecting China performance below expectations), etc etc, and breathe….
Also, in technical news, I’m also seeing some divergence on the RSI, and GU is overbought.
My Scenarios
Here’s my scenarios on the chart, end of today I’m expecting to be around the 1.27 level on the chart based on retracement from Friday’s high and DXY having some room to move up to resistance (around 1.03), but let’s see what happens today and I'll review this again this evening.
1. Red CPI / 0.25% Hike
This is an inflation figure that comes in below the 8.5% prediction and the BoE raising rates by 0.25%.
This is what I think will happen and it will mean reversal.
2. Red CPI / 0.5% Hike
This is an inflation figure that comes in below the 8.5% prediction and the BoE raising rates by 0.5%.
This is what should happen if the BoE are brave enough, but I think it will worry markets about recession.
3. Green CPI / 0.25% Hike
This is an inflation figure that comes in above the 8.5% prediction and the BoE raising rates by 0.25%.
This is a terrible situation, inflation going up and the BoE still not having the balls to make up for lost time and tackle it head on.
4. Green CPI / 0.5% Hike
This is an inflation figure that comes in above the 8.5% prediction and the BoE raising rates by 0.5%.
In this scenario this is what I believe the BoE should do, it will likely cause GU to go up, but as I’ve said I personally think topside is limited by the prevailing downtrend. In this scenario there will be growing fears of a recession, change of government will be pretty much a given, so overall I still think this will be bad for GU in the medium term.
These are just my thoughts as we go into the next few days.
Interested to hear your comments so I can keep learning and adjusting my thinking!
Note
Higher than expected CPI (Green) caused a small spike, but it's clear now that the BoE have failed. The only way to combat inflation is recession, which is inevitable imho. If the BoE only raise by 0.25% it looks weak and will do nothing, if they raise by 0.5% it will put so much pressure on mortgages, banks etc. Overall I think the market will lose confidence in BoE, if not already and we're heading for a big crash. Either way, cheaper GBP is surely what all the Brexiter's asked for isn't it - self-sufficient economy, home grown produce, cheaper exports etc? Look at Japan's currency, and their economic performance...Note
We got the hawkish comments in the Powell speech, 'there is a long way to go to reduce inflation, and it is appropriate to continue raising interest rates before the end of the year' 's still work to do on inflation'.DXY is very close to the 4hr falling trendline now, if Powell maintains this impression during the actual conference then we may see a break of structure and a big move down for GU.
Note
Not long now. Interesting to see DXY very close to the long-term dynamic uptrend. Not sure if we're seeing rejection right now or just a sell off of XXXUSD crosses ahead of the BoE decision. I'm thinking the market is expecting 0.5% now, SNB rose 0.25% this morning (and they only review every 3 months), if BoE do the same then I'm expecting a fall after a spike, but let's see. If DXY rejects off the trendline then it could be a big fall.
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