Market news
01.01.2001, 06:48

GBP/USD Outlook: Bulls move to sidelines amid UK political uncertainty, modest USD strength

  • GBP/USD edges lower for the second straight day amid a modest pickup in the USD demand.
  • The UK political uncertainty overshadows a stronger CPI and does little to lend any support.
  • Bets for a jumbo 100 bps BoE rate hike in November act as a tailwind and limit the downside.

The GBP/USD pair remains on the defensive for the second successive day on Wednesday amid a modest pickup in demand for the US dollar. Growing acceptance that the Federal Reserve will stick to its faster rate-hiking cycle to tame inflation continues to act as a tailwind for the greenback. In fact, the CME's FedWatch tool indicates a nearly 100% chance of the fourth successive supersized 75 bps rate increase at the next FOMC meeting in November. The bets were reaffirmed by hotter US consumer inflation figures released last week and the recent hawkish comments by several Fed officials.

Reiterating the Fed's commitment to bring inflation under control, Minneapolis Fed President Neel Kashkari said on Tuesday that the benchmark policy rate could rise above 4.75% if underlying inflation does not stop rising. This, in turn, assists the yield on the rate-sensitive 2-year US government bond and the benchmark 10-year Treasury note to hold steady near a multi-year peak. This helps offset the prevalent risk-on mood and provides a modest lift to the safe-haven greenback. Apart from this, the UK UK political uncertainty exerts additional downward pressure on the British pound.

In fact, rebels within the ruling Tory Party are coming together to replace the newly-elected UK Prime Minister Liz Truss in the wake of the recent tax cut fiasco. This, along with looming recession risks, overshadows hotter UK consumer inflation figures, which does little to lend any support to the GBP/USD pair. The UK Office for National Statistics reported that the headline CPI rose more than expected by 10.1% YoY in September. Moreover, the core inflation (excluding volatile food and energy items) surpassed estimates and climbed to 6.5% YoY from 6.3% in August. The data lifted bets for a jumbo 100 bps rate hike by the Bank of England in November, though fails to impress bulls.

The downside, however, remains cushioned, at least for the time being, allowing spot prices to hold above the mid-1.1200s. This warrants some caution for aggressive bearish traders and before confirming that the recent strong recovery move from an all-time low has run out of steam. Market participants now look forward to the US housing market data - Building Permits and Housing Starts - for a fresh impetus. In the meantime, the US bond yields, along with the broader risk sentiment, will drive the USD demand and produce short-term trading opportunities around the GBP/USD pair.

Technical Outlook

From a technical perspective, nothing seems to have changed for the major and a descending trend-line extending from September monthly high continues to cap the upside. The said barrier, currently near the 1.1380 region, is closely followed by the 1.1400 round figure. A sustained move beyond should allow the GBP/USD pair to aim back to retest the monthly high, just ahead of the 1.1500 psychological mark. Some follow-through buying will be seen as a fresh trigger for bullish traders and pave the way for a further near-term appreciating move.

On the flip side, the weekly swing low, around the 1.1210-1.1200 zone, might continue to protect the immediate downside. The next relevant support is pegged near the mid-1.1100s, below which the GBP/USD pair could turn vulnerable to test the 1.1100 mark. Failure to defend the said support levels will negate any near-term positive outlook and shift the bias back in favour of bearish traders. This, in turn, will set the stage for a fall towards the 1.1055-1.1050 intermediate support en route to the 1.1000 psychological mark.


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