POUND STERLING ANALYSIS & TALKING POINTS

  • More certainty around BoE leaves USD factors more interesting by means of Fed guidance (Jerome Powell).
  • U.S. economic data including NFP and ISM to clarify the picture moving forward.
  • Will the rising wedge strike again?

GBP/USD FUNDAMENTAL FORECAST: BEARISH

The British pound prepares itself for a stacked week ahead that include both Bank of England (BoE) and Federal Reserve interest rate decisions respectively (see economic calendar below). The BoE has hinted at yet another 50bps hike which is confirmed by money market pricing as seen in the table below. While this is largely priced into GBP crosses, the vote split shown in the February meeting may provide some price volatility. Last meeting saw a majority in favor of 50bps but considering new economic data there may be additional votes split between 50bps and 25bps with the BoE’s Tenreyro and Dhingra possibly remaining with their unchanged stance – this would likely result in a bearish reaction on the pound. On the contrary, softer energy prices may be limiting recessionary fears but with 2023 terminal rates expected around 4.5% (agreed to by Governor Bailey), the BoE may remain on this path maintain it’s institutional credibility.

BANK OF ENGLAND INTEREST RATE PROBABILITIES

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Source: Refinitiv

From a USD point of view, markets are looking through the Fed’s guidance of a 5% terminal rate for 2023 on the basis of slowing inflationary pressures. The labor market on the other hand has been extremely resilient and will be closely watched next week via the Non-Farm Payroll (NFP) report. In addition, ISM services data is key bearing in mind that the U.S. is primarily a services driven economy (a close eye will be on wage statistics as well).

FEDERAL RESERVE INTEREST RATE PROBABILITIES

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Source: Refinitiv

GBP/USD ECONOMIC CALENDAR

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Source: DailyFX Economic Calendar

TECHNICAL ANALYSIS

GBP/USD DAILY CHART

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Chart prepared by Warren Venketas, IG

Daily GBP/USD price action has now been hovering around the December 2022 highs with no success from bulls to confidently push through this resistance zone just yet. Next week’s fundamental drivers could certainly provide the catalyst depending on the meeting outcomes. Bears will be looking closely at the developing rising wedge formation (black) for the second time since the December breakout played out in a textbook fashion. With the Relative Strength Index (RSI) level close to overbought territory, a leg lower is not impossible; while an invalidation of the wedge formation may occur should we see a daily candle close above the 1.2500 psychological handle.

Key resistance levels:

  • 1.2500
  • 1.2407

Key support levels:

  • Wedge support
  • 1.2154/200-day SMA
  • 1.2000

BEARISH IG CLIENT SENTIMENT

IG Client Sentiment Data (IGCS) shows retail traders are currently SHORT on GBP/USD, with 57% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment but due to recent changes in long and short positioning, we arrive at a short-term downside bias.

Contact and followWarrenon Twitter:@WVenketas

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