GBP/USD braces for BoE, Fed

Key economic data releases this week out of the UK in the run-up to Thursday’s Bank of England (BoE) rate decision have been lackluster, but the widespread expectation continues to be that the central bank will hold rates steady after cutting by 25 basis points last month to a record low 0.25% on post-Brexit economic concerns.

Earlier this week, August’s Consumer Price Index (CPI), a key inflation indicator, disappointed expectations by remaining at 0.6% year-over-year against expectations of an increase to 0.7%. Also, Wednesday’s jobs numbers were a mixed bag, with the Average Earnings Index rising by more than expected at 2.3% versus the 2.1% forecast, but the Claimant Count Change showed higher unemployment at +2.4K against the +1.7K forecast. Despite these less-than-ideal data points this week, UK economic releases in recent weeks have generally been positive overall, leading many to believe that the post-Brexit concerns leading to August’s rate cut may have largely been unwarranted.

On the US dollar side, several economic data releases this week will precede next week’s highly-anticipated FOMC meeting. These releases include: the Producer Price Index (PPI), Consumer Price Index (CPI), retail sales, consumer sentiment, weekly jobless claims, and the Philly Fed Manufacturing Index. Any of these releases could have some impact on the Fed’s rate decision and the US dollar. Currently, the market’s view of the probability of a Fed rate hike next week continues to be exceptionally low at around 15%. But this could change quickly if there are some unexpected surprises in this week’s US economic data.

From a technical perspective, GBP/USD has just pulled back within the past week to revisit both its 50-day moving average as well as the upper border of a triangle pattern that had been broken to the upside in the beginning of September. This triangle’s upper border may now be considered as support, along with the 50-day moving average, and the currency pair tentatively bounced off that support on Wednesday. If the triangle and moving average continue to support GBP/USD, a rebound could quickly target the 1.3500 resistance level and above. This would likely be contingent, however, on a more hawkish stance from the Bank of England on Thursday. In the event of more dovish nuances, however, a breakdown back into the noted triangle pattern could see GBP/USD drop back towards 1.3000 psychological support.

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