GBP/USD rises on central bank divergence, but gains could be limited
- UK inflation at 6.8% is still very high
- Investors rein in Fed hiking bets
- GBP/USD trades in an ascending triangle
GBP/USD is pushing higher after modest gains in the previous week. The pound managed rise on Friday despite UK manufacturing PMI data confirming that the sector slumped sharply in August. The manufacturing PMI came in at 43 in August, down from 45 in July.
The data adds to evidence that the UK economy is coming under increasing pressure as the BoE continues to hike interest rates to tame high inflation.
Over the weekend, the UK chancellor of the exchequer, Jeremy Hunt, provided some optimism that inflationary pressures could ease further. Hunt said that inflation is expected to decline to 5% by the end of the year. However, he warned of a blip in September when inflation may tick higher before continuing with the cooling trajectory. The BoE projects inflation will also fall to 4.9% by the end of 2023 from its current 6.8% YoY level.
Bets that the BoE will hike rates by 25 basis points twice more before the end of the year has eased, but the possibility remains on the table.
While wage growth in the UK was at record levels and core inflation is still elevated, the Bank of England will likely remain hawkish even as signs show that the UK economy is stalling.
A 25 basis point rate hike in the September meeting is pretty much a given, making the 15th straight hike and taking rates to 5.5%. However, what comes next is less certain, and the BoE could become more data-dependent.
There is no UK economic data due to be released today and no BoE commentary expected today. However, investors will get a sense of the BoE’s intentions on Wednesday when the central bank governor Andrew Bailey and his team will attend the July joint Treasury Select Committee hearing.
Meanwhile, the market has reined in expectations for further rate hikes from the Federal Reserve after weaker-than-expected U.S. economic data last week. However, with inflation still above the Federal Reserve's 2% target, Fed hawks could keep the door open for another rate hike before the end of the year.
There is no high impacting U.S. economic data today owing to the Labour Day public holiday. There will be plenty of Federal Reserve speakers across the week.
Monetary policy divergence currently favors the pound. However, with the likelihood of a UK recession growing while the US economy appears to be heading for a soft landing, the BoE could be the first central bank to cut rates in 2024.
GBP/USD forecast – technical analysis
GBP/USD trades in a descending triangle, a bearish pattern that anticipates a lower breakout. The RSI below 50 supports further downside.
Sellers will look yto break below 1.2550 the August low to extend the bearish trend towards the 1.25 round number and 1.2420 the 200 sma.
On the upside, buyers will look for a rise above 1.2650 the 100 sma, and 1.27 the falling trendline resistance. A rise above 1.2730, last week’s high could create a higher high.