POUND STERLING – ANALYSIS AND DISCUSSION POINTS
- Money markets may have overreacted to last week’s UK economic data and are now expecting three more rate hikes by 2023.
- All eyes are on US data ahead of the Fed’s rate decision.
- GBP/USD is looking for a fundamental catalyst to break out of the sideways movement.
GBPUSD FUNDAMENTAL BACKGROUND
The British pound remains resilient against the USD on Monday morning as little data is expected from the UK this week. A quick review of last week showed higher inflationary pressures, marginal improvements in retail sales and PMI figures, and tight labour market data. Markets reacted quite aggressively, leading the Bank of England (BoE) to reassess its interest rate probabilities (see table below) and now consider almost three more rate hikes this year! Although this is probably an overestimate, it looks as if the BoE will not cut rates at all this year. The consequences of already tight monetary policy could still be felt, which is why I expect fewer than three rate hikes this year and take a more patient stance before rushing to raise rates.
BANK OF ENGLAND INTEREST RATE PROBABILITIES
This week it’s the US’s turn, as shown in the economic calendar below. A range of important data that will contribute to the Fed’s upcoming interest rate decision next week. The Fed’s guidance is rather one-sided and argues for a longer-term higher approach to containing inflation. However, the Fed’s blackout period has begun, so markets will not receive any further insights until May 4 (the end of the blackout period), which underscores the upcoming data. Most data are expected to point to a slowdown in the US economy, leaving room for further pound strength if this proves true.
GBP/USD DAILY CHART
The GBP/USD price on the daily chart remains indecisive within the short-term consolidation pattern (green). With no major releases due today, I expect minimal price action in the pair between the psychological levels of 1.2400 and 1.2500 respectively.
Key resistance levels:
Key support levels:
BEARISH IG CLIENT SENTIMENT
IG Client Sentiment Data (IGCS) shows that retail traders are currently net SHORT on GBP/USD, with 57% of traders net short (at the time of this writing). At DailyFX, we are usually contrarian to the sentiment of the crowd, but due to recent changes in long and short positions, we are coming to a short-term downward bias.