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British Pound Sinks as Traders Pare BoE Rate Hike Bets, GBP/USD Dances on Support

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BRITISH POUND FORECAST:

  • GBP/USD takes a turn to the downside as traders pare back bets on Bank of England future rate hikes
  • Market pricing on monetary policy, however, could turn more hawkish in the coming weeks as red-hot UK inflation will likely required a more aggressive response from the central bank
  • This article looks at cable’s key technical levels to keep an eye on in the near term

Most Read: April UK Inflation Hits a 40-Year High at 9%, GBP/USD Slides

After staging its biggest rally in 17 months on Tuesday, the British pound reversed course on Wednesday and took a sharp downward turn, sliding 0.65% to 1.2411, as traders pared back money market bets on Bank of England future rate hikes following slightly lower-than-anticipated inflation data.

By way of context, the April UK consumer price index rose 2.5% m-o-m and 9.0% y-o-y, a tenth of a percent below consensus expectations. While this was the first time that the report did not surprise on the upside in recent months, it is misguided to believe that in itself is a victory, given that price pressures continued to broaden, pushing the cost of living to a new four-decade high.

With CPI expected to climb to double digits during the second quarter, and rising wages threatening to exacerbate the trend, the central bank will likely become more hawkish over the coming weeks and signaled it will have to pull back accommodation more aggressively despite rapidly slowing growth.

True, the likelihood of a recession has increased sharply of late, but the UK labor market is still in a good place and should withstand a steeper path of interest rate hikes without collapsing. In any case, policymakers, who now face a large credibility problem, may soon recognize that it is better to go hard now on the tightening cycle to restore price stability than to risk a long-term stagflationary slump that that could be far more damaging to the economy.

If markets begin to price in a more forceful monetary policy response to the current inflationary environment from the BoE, GBP/USD should stabilize and manage to retrace some of the 2022 losses, especially as the Fed has ruled out supersized 75 bps hikes for now. However, any recovery in sterling should be moderate, as headwinds affecting the UK economy are likely to reduce appetite for long positions in the European currency.

In terms of technical analysis, despite Wednesday’s sharp pullback, cable remains above the psychological 1.2400 level at the time of this writing. If traders manage to defend this support and spark a rebound in the coming sessions, the first resistance to consider appears at 1.2650, followed by 1.2835. On the flip side, if downside pressure accelerates and sellers breach the 1.2400 area decisively, GBP/USD could be on its way to retest its 2022 lows in short order.

GBP/USD TECHNICAL CHART

GBP/USD Chart Prepared Using TradingView

EDUCATION TOOLS FOR TRADERS

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  • IG’s client positioning data provides valuable information on market sentiment. Get your free guide on how to use this powerful trading indicator here.

—Written by Diego Colman, Market Strategist for DailyFX





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Weekly wrap up! – 24 June 2022

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European bond markets sold off as stock markets bounced. Bundesbank President Nagel warned yesterday that central banks must not respond to higher inflation with “too little, too late” and that “if monetary policy falls behind the curve, even stronger hikes in interest rates could become necessary to get inflation under control” which would lead to higher economic costs. German Ifo business confidence numbers came in weaker than expected this morning, which together with the disappointing PMI reports yesterday added to recession fears, but for now stock market sentiment is looking a bit brighter.

Click here to access our Economic Calendar

Stuart Cowell

Head Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.






Previous articleEvents to Look Out for Next Week

With over 25 years experience working for a host of globally recognized organisations in the City of London, Stuart Cowell is a passionate advocate of keeping things simple, doing what is probable and understanding how the news, charts and sentiment work together to provide trading opportunities across all asset classes and all time frames.




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Borussia Dortmund takes silver medals in Bundesliga « Blog InstaForex

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Great news came from Germany lately. The FC Borussia Dortmund, the regional partner of the international fintech company InstaForex, took second place in the Bundesliga.

The German Bundesliga is the highest division of the German football championship. It is traditionally held from August to May. Last season was the pre-anniversary season. It was held for the 59th time. As always, it brought together 18 of the best teams in the country.

Borussia Dortmund is one of the leading professional football clubs in Germany. Over its 100-year history, it has won many prestigious trophies, including the UEFA Champions Cup in 1997.

InstaForex has been Borussia Dortmund’s partner for a long time. The company follows the team’s successes. This time, Borussia Dortmund delighted their loyal fans with several reasons to celebrate.

Let’s start with the most obvious. The second place in Bundesliga guarantees Borussia Dortmund to pass to the group stage of the Champions League next season.

The team qualified for Europe’s most prestigious tournament along with Bayern Munich, which won the Bundesliga 2021-2022.

Bayer 04 Leverkusen and RB Leipzig were behind Bayern and Borussia but also clinched Champions League promotion.

Another reason to be excited is the fact that Borussia Dortmund became the Bundesliga vice-champion for the tenth time!

In addition, the team won gold and bronze in the German national championship. Currently, it has eight gold and seven bronze medals.

In the previous season, Borussia Dortmund finished third in the Bundesliga. The football team managed not only to improve its previous result but also to renew the club record. For the first time in its history, Borussia Dortmund scored 85 goals in a single season.

We should also highlight other successes of the team. From August 2021 to May 2022, Borussia Dortmund played 34 games and won 22 of them gaining 69 points.

The most memorable matches of the season were the impressive sweeps of Freiburg (5:1), Borussia Mönchengladbach (6:0), and Wolfsburg (6:1).

InstaForex congratulates its partner on a brilliant season and wishes the team new bright achievements. There is no doubt that together they will come to even greater victories!

 



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GBP/USD retreats towards 1.2250 as Conservatives fail in UK by-elections, Retail Sales eyed

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  • GBP/USD pulls back from intraday high during the first positive day in three.
  • Conservatives lost two Parliamentary seats in the UK by-elections, challenges to PM Johnson mounts.
  • Downbeat UK data and disappointment from BOE keep cable bears hopeful.
  • British Retail Sales for May will be important considering its lion share in GDP.

GBP/USD justifies UK’s political pessimism to take a U-turn from the intraday high, near 1.2270 during early Friday morning in Europe. Even so, a softer US dollar and anxiety ahead of the UK’s Retail Sales for May, up for publishing at 06:30 GMT, challenge the Cable pair sellers.

UK PM Boris Johnson witnesses defeat in previously safe seats for the Conservatives during the by-elections. Among them, Liberal Democrats Party won the Tiverton and Honiton seats while Labour Party won in Wakefield. It’s worth noting that UK PM Johnson lost confidence after the partygate scandal and hence raised worries about the further GBP/USD weakness.

Elsewhere, downbeat prints of the UK PMIs for June and early signals for Retail Sales weighed on the GBP/USD pair the previous day. UK’s S&P Global/CIPS Manufacturing Purchasing Managers’ Index (PMI) dropped to 53.4 in June, versus 53.7 expected and May’s final reading of 54.6. The Services PMI reprints the previous month’s final reading of 53.4 while staying below 53.0 forecasts.

Further, the Confederation of British Industry’s (CBI) latest Distributive Trades Survey showed on Thursday that the UK’s Retail Sales Balance dropped to -5 in June versus -1 prior. Additionally, the three-month average dropped to the lowest level in a year with -14 versus -9 previous readings.

On the other hand, the US Dollar Index (DXY) snapped the three-day downtrend the previous day, down 0.11% intraday near 104.30 by the press time, as Fed Chair Jerome Powell’s concern for recession joined downbeat US PMI data to favor the greenback buyers the previous day. However, the mentioning of inflation and recession woes as the challenges to ensure a smooth landing, despite expecting firmer growth this year, weigh on the DXY.

Amid these plays, the Wall Street benchmarks closed positively due to the downbeat Treasury yields. However, the S&P 500 Futures rise 0.30% while the US 10-year Treasury yields remain firmer around 3.09%, after dropping to a fortnight low the previous day.

Moving on, UK Retail Sales contribute nearly 60% to the British GDP and hence become important for the GBP/USD pair traders. The key data is expected to improve on YoY but may disappoint on MoM. It should be observed that the Bank of England’s (BOE) refrain from announcing faster rate hikes than already planned could weigh on the quote even if the data manage to offer a positive surprise.

Technical analysis

GBP/USD fades bounce off a six-week-old horizontal support area, around 1.2170-60. On the contrary, buyers need validation from 1.2285 to trigger the upside momentum. Even so, the 100-SMA could test the bulls around 1.2345.

 



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