GBP/USD Fundamental Backdrop

The pound opened the morning stronger against the dollar mostly driven by USD weakness but concerns over colder-than-expected temperatures over the winter months have heightened fears about energy supply shortages. While markets are mainly focused on the Federal Reserve’s interest rate announcement tomorrow, the Bank of England (BoE) announcement will quickly take center stage post-release. Money markets have been drawing down on rate hike expectations but still, remain around 75bps – see table below, a likely overestimation of what could be a 50bps increment if recent BoE commentary is anything to go by.

BOE Interest Rate Probabilities

Source: Refinitiv

The economic calendar kicked off the day with a decline in housing prices for October – the biggest fall since COVID and may signal the beginning of a property slump. Higher interest rates have been the principal driver of this decline as the UK looks to quell inflationary pressures however, the average consumer remains the biggest loser. Later today, the UK manufacturing PMI is due and is estimated to drop significantly highlighting the poor economic state in the UK. Moving over to the U.S., both S&P Global and ISM manufacturing PMI releases are scheduled but are unlikely to move the needle considering the U.S. is primarily a services-driven economy. A miss below 50 will place the U.S. into a contractionary territory and may extend the dollar’s decline today giving GBP bulls some support.

GBP/USD Economic Calendar

Source: DailyFX Economic Calendar
 

Technical Analysis

GBP/USD Daily Chart

(Click on image to enlarge)

Chart prepared by Warren Venketas, IG

Daily GBP/USD price action shows the continued development of the rising wedge formation (yellow) as prices hover around the 1.1500 psychological handle. My forecast favors a dollar bias which mirrors the traditional consequence of the falling wedge. Fundamental catalysts including the FOMC meet and BoE rate decision should provide the stimulus required for a wedge downside breakout or invalidation by way of GBP upside.

Key resistance levels:

• 1.1646/100-day EMA (yellow)

Key support levels:

• 1.1500
• 50-day EMA (blue)
• 20-day EMA (purple)
• Wedge support
   

Mixed IG Client Sentiment

IG Client Sentiment Data (IGCS) shows retail traders are currently 57% LONG on GBP/USD (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, due to recent changes in long and short positioning we prefer a short-term cautious disposition.

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