Long GBP/USD Contingent Upon Bounce After Retracement
- The Bank of England is likely to raise the benchmark interest rate by 25-bps
- GBP/USD fundamentals support sterling as yield differentials and rate expectations favor GBP
- The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library
Bank of England to Hike Policy Rate
On Thursday, the Bank of England is likely to hike the bank rate once again, to calm stubborn inflation. Current consensus suggests a 25-basis point hike is most likely with markets even pricing in an outside chance of a 50 bps-hike.
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UK bond yields are outpacing US yields of the same maturity as markets fail to believe the Fed’s hawkish message. On the other hand market rate expectations appear overly optimistic for the BoE and perhaps a little light for the Fed as markets expect a further 130 bps in tightening from the BoE while hardly acknowledging one more 25 bps hike form the Fed. Such divergence bodes well for the pound longer-term and can support sterling going forward.
132 Basis Points Expected for BoE Before Year-end
Source: refinitiv
Technical Analysis Around Bullish GBP/USD Setup
Cable, along with other FX pairs at the start of this week, exhibits a countertrend move. The pair heads lower, towards the zone of support around 1.2700 ahead of UK CPI and the BoE meeting. The pullback is desirable for a market that has already risen into oversold territory on the RSI, hinting that the move has become overheated.
With a 25% of a 50-bps hike on Thursday, there is a possibility that a 25 -bps hike may underwhelm markets, leading to a further pullback in the pair possibly towards 1.2676 or even 1.2585. However, market expectations around future rate hikes is likely to keep the pound supported and a rising yield differential (respective 10 year government bond yields) also supports the bullish view on GBP/USD. To the upside, a potential targets can be considered at 1.3000.
GBP/USD Daily Chart
Source: TradingView, prepared by Richard Snow
--- Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
