Currency Pair of the Week: GBP/USD

GBP/USD has been on quite a roller coaster this summer and ride looks like it will continue.

UK

GBP/USD has been on quite a roller coaster this summer and ride looks like it will continue.  This week brings both the US Federal Reserve and the Bank of England Interest Rate Decisions.  In addition, a breakdown in the trade deal with the EU in Brexit negotiations could add further volatility to the pair.

The US Federal Open Market Committee (FOMC) will meet on Wednesday to discuss interest rates and stimulus in the current environment.  Expectations are for the Central Bank to leave the key interest rate unchanged at 0.25%.  The Fed has said recently that they will leave interest rates low for years to help support the economic recession while letting inflation run hot over time to seek an average inflation of 2%.  Traders will be watching for clues as to “how long” the Fed is willing to let inflation run hot, as there has been no mention of a timeframe.  In addition, traders will be paying attention to the Summary of Economic Projections (the dot plot), as they will include an outlook through 2023.  The question traders will be asking is “Does that Fed think interest rates will rise in 2023?”

In addition to the US FOMC meeting, The Bank of England (BOE) will meet on Thursday to discuss its own interest rate policy.  Expectations are for the BOE to leave rates unchanged at 0.1% while maintaining the size of its bond buying program at 745 billion Pounds, which is expected to be enough to last until the end of 2020.  As MPC members have expressed concerns that the negative effects of the coronavirus could be worse than initially feared, traders will be watched to see if the Central Bank sets the table for more stimulus at the November meeting.  In addition, some members have expressed the possibility of taking rates negative, something that the ECB and BOJ have already done.  Traders will be watching for clues to see if the BOE is open to the possibility of taking this step.

The BOE not only faces the task of dealing with the pitfalls of the coronavirus, but also those of the ongoing negotiations of Brexit.  As the light gets dimmer and dimmer on the chances of a trade deal, the Central Bank must also figure out how to navigate the consequences of a no-deal Brexit.  Boris Johnson is threatening to depart from the Withdrawal Agreement and has introduced the Internal Markets Bill, which lawmakers say would break international law.  The bill’s main purpose is to clarify uncertainties regarding Northern Ireland (and to play chicken with the EU).  The bill will be debated this week in the House of Commons.  The EU has threatened legal action if the UK departs from the Withdrawal Agreement. 

GBP/USD lost 3% last week.  On a weekly timeframe, depending on how one draws the downward sloping trendline, price posted a false breakout above a descending wedge and is now trading just back within the wedge.  The top trendline of the wedge crosses near 1.2950.

Source:  Tradingview, City Index

On a daily timeframe, GBP/USD has been in a rising wedge formation since early June.  The pair put in a shooting star candlestick on September 1st near 1.3485, only to begin trading lower throughout the month of September.  The pair broke lower from the rising wedge (and back below the falling wedge top trendline on the weekly timeframe).  So far, GBP/USD has held the 200 Day Moving Average near 1.2733 (first support) and the 38.2% Fibonacci retracement level from the March 20th lows to the September 1st highs near 1.2691 (second support).  First resistance above is the previously mentioned weekly trendline and near 1.2970, then they September 10th highs near 1.3035.

Source: Tradingview, City Index

Make sure to watch both the FOMC on Wednesday and the BOE on Thursday.  The more dovish central bank should win the battle for the weaker currency.  In addition, if things continue the same path towards negotiations in Brexit, GBP/USD could continue lower.  However, if the tide begins to change in negotiations, GBP/USD can jump higher on any positive headlines.


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