Currency Pair of the Week: GBP/USD

The looming uncertainty surrounding GBP/USD has to do with the fate of Boris Johnson. Will the fallout of “partygate” cost him his job?

FOREX 9

The UK employment situation continues to strengthen.  In December, the number of people claiming unemployment benefits fell by 43,300 vs an expectation of -36,000.  In addition, the revision to the November print nearly doubled from -49,800 to -95,100.  The Unemployment Rate fell to 4.1% vs 4.2% expected and 4.2% in November.  On the inflation front, the UK will release December CPI on Wednesday. Expectations are for a headline print of 5.2% YoY vs 5.3% YoY in November.  If CPI comes out as expected, it will be the highest reading since September 2011.  Core CPI, which excludes food, energy, alcohol and tobacco, is expected to be 3.9% YoY vs 4.0% YoY in November.  With the elevated inflation readings and strong employment data, the CME BOE Watch Tool is showing that markets are pricing in a 100% chance of a rate hike at the February 3rd meeting. 

Central Banks: Liftoff in Focus?

The political climate in the UK is doing little to help the BOE.  Boris Johnson’s future hangs in the balance amid a growing backlash from both back benchers and the general public over “partygate”.  Ex-advisor Dominic Cummings accused Johnson of lying to Parliament saying the PM was fully aware of the situation.  Rebel Torries want Johnson to resign and some are pressing colleagues to submit letters on no confidence!  The situation has yet to affect the GBP, however it remains volatile.

 

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The last 2 months, Non-Farm Payroll readings averaged only +224,000. Despite that, the Unemployment Rate stands at 3.9%. According Jerome Powell and fellow Fed officials, this is enough to consider the US to be at maximum employment.  However, of even more concern, is the surging inflation.  CPI last week printed at 7%, the highest level in nearly 40 years.  The Fed seemingly has been on a mission let everyone know that rate hikes are on the way, as early as the March meeting. Even the most dovish member of the Fed, Neel Kashkari, is looking for 2 rate hikes this year!  According to the CME Fed Watch tool, markets are pricing in an 88% chance of a rate hike in March.  In addition, markets are looking for a total of 4 rate hike this year! Note that there is a FOMC meeting on January 26th, however markets are only pricing in a 5% chance of a rate hike. 

Forecasting 2022 inflation: Transitory no more?

GBP/USD has been on a tear since pulling back to the 38.2% Fibonacci retracement level from the lows of March 2020 to the highs of February 2021, near 1.3166.  The pair retraced the prior descending wedge dating back to November 19th, 2021, and then some. In total, GBP/USD rallied 575 pips from 1.3173 on December 20th, 2021 to 1.3748 on January 13th.  The pair came to a halt at a confluence horizontal resistance and the 200 Day Moving Average, while the RSI has moved into overbought territory.  The price action on January 13th, formed a gravestone doji, an indication that price could move lower. It hasn’t looked back since.

20220118 gbpusd daily

Source: Tradingview, Stone X

On a 240-minute timeframe, GBP/USD has pulled back from the highs, through the bottom trendline of the upwards sloping channel near 1.3650 and horizontal support near 1.3600.  The pair appears to be on its way to the next support level at the 38.2% Fibonacci retracement from the lows of December 20th, 2021 to the highs on January 13th, near 1.3528.  There is also horizontal support near at that area at 1.3517.  Below there is the 50% retracement level and the 61.8% Fibonacci retracement level from the same timeframe at 1.3460 and 1.3393, respectively.  Resistance is near 1.3650, then the recent highs at 1.3748.  Above there, resistance is back at the October 2021 highs near 1.3834 (see daily).

20220118 gbpusd 240

Source: Tradingview, Stone X

The BOE appears ready to hike interest rates at the February 3rd meeting, or otherwise severely disappoint the markets!  But the looming uncertainty has to do with the fate of Boris Johnson.  Will the fallout of “partygate” cost him his job?  Will it affect the value of the Pound?  With hawkish comments from Fed officials last week, the US appears well on its way to raising rates as well.  Barring fallout from the UK political situation, the price of GBP/USD will depend on who is expected to raise rate the most.

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