Rate rises are coming to the United States, which has boosted the Dollar. Can Boe save the Pound? US nonfarm payrolls are subject to lengthy volatility.
This Week’s GBP/USD: Powell’s Hawkish
The Fed kept its policies steady but shifted its tone to the hawkish side. The Fed Chair, Jerome Powell, did not rule out raising rates at every meeting, meaning four times in 2022. Instead of 25bp increases, he allowed for 50bp increases.
On the economy, Powell said there is “some room to raise rates without damaging employment,” and that price stability guarantees a protracted economic expansion. Unlike the earlier focus on employment,
While markets fell before the Fed, the Dollar rose in reaction to the Fed’s hawkish attitude on inflation. In a protracted reaction, GBP/USD fell below 1.34.
The annualized growth rate in the United States was 6.9%, up from the 5.5 % expected. Despite increased inflation, the world’s largest economy has grown quickly since 1984.
In the UK, politics dominated. At this posting, Prime Minister Boris Johnson faced resignation requests and a police probe-on top of a civil servant inquiry. The intriguing political intrigue weighed on Sterling, but only slightly.
As diplomatic discussions dragged on, Russia continued to build its forces. It’s unclear what President Vladimir Putin intends, but thoughts that an invasion would be postponed until after the Beijing Winter Olympics kept markets quiet.
The decline of COVID-19 cases from the pandemic’s peak optimism is over. That allowed GBP/USD to follow other developments, most notably the Fed.
UK Developments: Boris, But More Crucially, The BOE
If PM Johnson is forced out, Sterling may suffer in the short term, but the prospect of Chancellor Rishi Sunak—or even more extreme moderates—in No. 10 would reassure markets. Prime Minister’s Questions—Wednesday at noon —is important for British traders. But political news is meaningless without major developments.
What news is significant? Sue Gray’s probe into the PM’s parties is due to be published, but when? There may be nerves if she drops a bombshell that forces Johnson out, there may be nerves, but the simultaneous police probe may cause delays.
The Bank of England’s rate announcement is notable. The “Old Lady” will boost rates from 0.25 to 0.50 %. Traders want to know what happens next, even if they doubt BOE Governor Andrew Bailey’s statements.
The rate is rising, and a reduction in the central bank’s bond-buying program (now £895 billion) would support the Pound. The BOE’s inflation estimates in the Monetary Policy Report stand out without unambiguous indications.
Notably, this is a “Super Thursday” event with a press conference, enhancing the likelihood of significant volatility.
Non-Farm Payrolls Stick Out In The US
RUSSIA WILL INVADE Ukraine Putin knows it. The strategy for GBP/USD is simple: sell cable on any conflicts, since the safe-haven currency profits while Britain relies on Russian gas. If tensions ease, the currency pair benefits, however somewhat.
Assuming no significant safe-haven flows due to Eastern European developments, the Dollar will focus on domestic data, culminating with nonfarm payrolls.
Monday brings the ISM Manufacturing Purchasing Managers’ Index. The 58 handle shows a strong increase in a small but substantial area. Prices paid, a measure of inflation, may outperform expectations.
It will be interesting to see how ADP’s private-sector jobs data relates to the previous report. The biggest payroll business in America added 807,000 jobs, but the NFP added only 199,000. A small rise of 250,000 is expected.
It stuck out on Thursday. The job component is more important because it correlates well with the NFP. The December reading of 54.9 indicated slight job growth.
Lastly, nonfarm payrolls for January 2022 are expected to rise by 238,000. The Omicron COVID strain has caused temporary employment losses in services.
The cold ached. The Dollar’s silver lining might be adjustments to prior months’ salaries and bonuses.
The current economic forecast predicts annual growth of 5.1 %. The unemployment rate is expected to stay at 3.9%, although surprises are common.
Analysis Of The GBP/USD
GBP/USD CHART Source: Tradingview.com
The excessive volatility of the Pound has been likened to a developing market currency—and the chart backs this up. Cable dropped off the sharp uptrend support line, giving the bears complete control.
The pair fell below the 50-day and 100-day SMAs, reversing momentum.
The 1.3350 level provided critical support in November and late January. Then comes 1.3270, a December resistance level, then 1.32 and 1.3170.
The 1.3440 level held cable back in mid-January. The November swing high of 1.3515 is followed by 1.3550 and 1.36.