GBP/USD Teases Support Ahead of UK CPI and Fed Decision

GBP/USD is showing signs of stabilising near support as traders prepare for a potentially volatile combination of UK inflation data and the Federal Reserve decision. Rising expectations for a BoE hike later this year could support sterling, particularly if UK CPI surprises higher or the Fed falls short of increasingly hawkish market expectations.

 

GBP/USD Holds Near Support as UK CPI and Fed Risks Loom

BoE Rate Hike Expectations Shift Towards November and December

Expectations are for the Bank of England (BoE) to hold its interest rate at 3.75% this week, although the odds of a hike have risen sharply from 15.6% a week ago to 43.2%, according to overnight index swaps (OIS). While December is currently favoured with a 90.8% probability of a hike, November remains a live meeting at 66.4%.

Yesterday’s labour market report cast some doubt over a November hike, with claimant counts jumping to a two-year high and private-sector wage growth slowing to a near six-year low of 2.9%. This reduces concerns that the energy shock will feed into a renewed wage-price spiral.

Moreover, three MPC members voted to hike in July, with Pill, Greene and Mann all in favour of a 25bp move. Any further shift towards the hawkish camp could strengthen the case for a November hike, although today’s CPI figures may provide an early indication of whether such a shift is likely.

With energy prices elevated and inflation risks rising, a hike this year increasingly looks likely. The bigger question is whether it arrives in November or December — and today’s inflation figures could go a long way towards answering that.

Source: Bank of England (BOE), LSEG

Will the Fed Deliver, or Fall Short of Hawkish Expectations?

Of course, we also need to factor in today’s FOMC meeting. With money markets pricing close to a 90% probability of a 25bp hike and the vast majority of economists expecting the same, attention shifts to whether the Fed signals another hike in December and how much further tightening officials expect in 2027.

The FOMC will update its Summary of Economic Projections (SEP), with the dot plot and median interest-rate projections quickly revealing how hawkish policymakers are heading into next year. This could prove particularly important under Kevin Warsh, who has so far provided less forward guidance than markets had become accustomed to under previous Fed leadership.

Source: BOE, Federal Reserve, Office for National Statistics (ONS), LSEG

GBP/USD Could Benefit if the Fed Falls Short

I cannot help but wonder whether the Fed will deliver the hawkish confirmation markets are pricing in. If it falls short, that leaves room for a pullback in a US dollar that is already bid ahead of the event. And if that is combined with a hot UK CPI report and increased odds of a November BoE hike, it could bode well for GBP/USD over the near term, which conveniently sits around key support levels.

 

GBP/USD Technical Analysis: British Pound vs US Dollar

It has been nice to see GBP/USD move lower in line with my near-term bearish bias outlined on Friday. Though already, it’s showing signs it wants to base out ahead of my ~1.3450 target near the 200-day SMA and high-volume node (HVN).

But with an FOMC meeting and UK inflation report incoming, there is scope for this tight support area to be tested or even broken if the data and policy expectations land the right way.

Given that the daily RSI (2) is near oversold heading into support, alongside my hunch that the Fed won’t quite deliver the level of hawkishness being priced in and the potential for a hot UK CPI print, my bias is for a near-term bounce on GBP/USD. Ideally, that support line currently holding prices gives way first before the real move unfolds.

Note that the 1-week implied volatility band has blown out to over 180 pips, implying a move of around 83 pips in either direction with approximately 65% probability.

Source: ICE, TradingView

EUR/GBP Technical Analysis: Euro vs British Pound

A descending triangle breakout on the weekly chart remains in play, though prices have been retracing against the original breakout from late June. However, momentum is now turning lower around the 200-week SMA, while the daily chart shows bears have regained control. Note the lower high ahead of the two-day selloff, while Tuesday’s small bullish inside day shows bulls struggling to regain control.

Bears could seek to fade into moves within Friday to Monday’s bearish range, with 0.8500 as an interim downside target. If the triangle target is met, EUR/GBP could be headed for 0.8438.

Source: ICE, TradingView