GBP/USD: BoE ‘hawkish hike’ likely required to prevent further downside

Only a ‘hawkish hike’ from the Bank of England (BoE) is likely to be enough to turn around the fortunes of GBP/USD given rapidly weakening fundamentals, hinting the path of least resistance remains lower for the foreseeable future.

GBP/USD pressured as the case for BoE rate hikes crumbles.

Just a few days ago another 25-point rate hike from the BoE was deemed a near-lock by traders and economists alike. However, a deluge of softer domestic economic data has meant a meeting in which most were focusing on whether the Monetary Policy Committee (MPC) would retain a hawkish bias or not has now flipped to whether it will hike at all?

Just look at the data to see why the odds of another hike have been diminishing as fast as the English football team during a penalty shoot-out: GDP fell 0.5% in July, a result blamed on wet weather. Hmmm, never wet in the UK, right? On the labour market, the unemployment rate rose to 4.3% in July while unemployment surged by 207,000 in the space of three months, the largest decline since late 2020.

And then came the big kicker on Wednesday with headline and core consumer price inflation coming in well under expectations in August, adding to the raft of other lagging indicators suggesting the domestic economy is coming off the boil.

If not for strength in wages, which largely reflects public sector demands rather than the private sector, the BoE would be able to slink back to the sidelines and let the economic cycle play out. With services price disinflation evident in the inflation report, it must surely have provided some comfort the risk of a damaging wage price spiral forming is diminishing, adding to the case to pause.

Two-way risk for GBP/USD as BoE meeting becomes a coin-flip

Markets now deem a 15^th consecutive increase in the bank rate as a literal coin-flip, meaning there are two-way directional risks for GBP/USD heading into BoE decision. However, much of the conversation is now centered on what the rate decision will be, rather than the guidance offered. Both are important, and only one outcome really stands out as likely to support GBP.

A “dovish hike” probably won’t, loosening financial conditions by lowering bond yields and supporting asset prices in signalling rate increases are over. The ECB wasted a hike last week by doing just that. I’m sure the BoE was watching. My favoured outcome, a “hawkish hold” where the BoE leaves the bank rate unchanged but signals the likelihood of further hikes, will also generate headwinds for the pound, creating doubts about the MPC’s willingness to act if the inflation threat begins to turn.

In reality, only a “hawkish hike” will be enough to spark a meaningful GBP/USD bounce. And with the domestic data turning, such an outcome appears highly unlikely.

GBP/USD looking ugly on the daily chart

About the only thing GBP/USD has going for it on the daily chart is that it’s oversold on the RSI, meaning further downside is likely to be a grind rather than a flurry. Attempts to squeeze shorts are probable but will provide opportunities to sell at better levels. Just below 1.2400 looks decent given the difficulty the pair has endured tackling the 200-day MA. The latter also offers decent protection against a reversal of the prevailing trend.

For those unwilling to take the chance that we won’t see any pops, a break of 1.2310 – the low hit in May – could herald a move down to 1.1800. There is not a lot of visible support evident between the two levels other than around 1.2200.

-- Written by David Scutt

Follow David on Twitter @scutty

StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please ensure you fully understand the risks involved by reading our full risk warning.

FOREX.com is a trading name of StoneX Europe Limited, and FOREX.com/ie is a domain operated by StoneX Europe Ltd, a member of StoneX Group Inc. StoneX Europe Ltd, is a Cyprus Investment Firm (CIF) company registered to the Department of Registrar of Companies and Official Receiver with a Registration Number HE409708, and authorized and regulated by the Cyprus Securities & Exchange Commission (CySEC) under license number 400/21. StoneX Europe is a Member of the Investor Compensation Fund (ICF) and has its registered address at Nikokreontos 2, 5th Floor, 1066 Nicosia, Cyprus.

StoneX Europe Limited is registered with the German Federal Financial Supervisory Authority (BaFin). BaFin registration ID: 10160255

FOREX.com is a trademark of StoneX Europe Ltd, a member of StoneX Group Inc.

The statistical data and the awards received refer to the Global FOREX.com brand.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

Through passporting, StoneX Europe is allowed to provide its services and products on a cross-border basis to the following European Economic Area ("EEA") states: Austria, Bulgaria, Croatia, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

Additionally, StoneX Europe Ltd is allowed to provide Investment and Ancillary Services to the following non-EU jurisdiction: Switzerland.

StoneX Europe Ltd products, services and information are not intended for residents other than the ones stated above.

Tied Agent Information: KQ Markets Europe Ltd with Company No. HE427857.
Address: Athalassas 62, Mezzanine, Strovolos, Nicosia Cyprus.
Services Provided: Reception and Transmission of Orders.
Commencement Date: 06/12/2022
Website: KQ Markets - CFD Trading | KQ Markets

We may pay inducements, such as commissions or fees, to affiliates or third-party introducers for referring clients to us. This is in line with regulatory guidelines and fully disclosed where applicable.

StoneX Europe Ltd may make third party material available on this website which may contain information included but not limited to the conditions of financial markets. The material is for information purposes only and does not contain, and should not be construed as containing, investment advice and/or investment recommendation and/or an investment research and/or an offer of or solicitation for any transactions in financial instruments; any decision to enter into a specific transaction shall be made by the client following an assessment by him/her of their situation. StoneX Europe Ltd makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. We are not under any obligation to update any such material. Any opinion made may be personal to the author and may not reflect the opinion of StoneX Europe Ltd.