BOE Rate Hike Expectations Weaken
An escalation in BOE rate hike expectations has been a major driver of GBP upside over the last month. Strong data from the UK coming out of the summer, accompanied by increasingly hawkish language from BOE members, including BOE governor Bailey, have seen the UK currency trading higher against a broad basket of its trading partners. Through much of September, the UK rates market was pricing in a strong likelihood a rate hike as early as November, in accordance with the BOE’s own guidance that such a move would likely be necessary to curtail rising price pressures.
CPI Falls Back
However, over the course of this week some questions have started to appear over the outlook for the British Pound. A softening in CPI over September, as reflected in yesterday’s data, asks whether the inflationary spike over the summer has come to an end and price pressures will now start to abate? The BOE itself had projected such a dynamic before the energy crisis ballooned and caused the bank to shift its view.
Fresh COVID
The COVID backdrop has also taken a worrying shift. The surge in cases over the last month as colder weather kicks in is raising fears over what lies ahead for the winter. More worrying is the explosion in cases of new, more infections variant than Delta labelled Nu. This week, the government outlined plans for the winter months and cautioned that, while a national lockdown is currently not on the table, the return of some restrictions might be necessary to stop the virus from getting out of control once again.
Downside Risks Building
For now, while the UK rates market has dialled back its near term rate hike expectations, GBP remains only slightly subdued. However, the risk is that as we move deeper into the UK winter, if virus rates continue to grow, expectations of fuller restrictions will cause investors to panic over the UK economic impact, causing GBP outflow. With this in mind, it appears that better risk reward lie sn the downside for GBP which is vulnerable to downside shocks on any negative headlines or BOE backpedalling.
Technical Views
GBPCAD
Following the breakdown through the rising channel from YTD lows, GBPCAD has seen demand creeping in on the approach to 1.6853. Price is currently correcting higher within a tight channel which can be viewed as a bear flag pattern putting the focus on an eventual breakdown and a continuation through 1.6853 and 1.6734. With the retail market around 90% long there is plenty of room for price to come off again here.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.