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With the US CPI, FOMC, UK CPI, BOE, and other second-tier data scattered throughout the week, GBP/USD could be extremely volatile.

The Bank of England meets on Thursday to discuss interest rate policy. Markets are currently expecting the Monetary Policy Committee to hike by 50bps, which would bring interest rates to 3.5%. At the previous meeting, the BOE hiked rates by 75bps but warned that the terminal rate will be lower than markets are anticipating due to a current recession, which could last up to 2 years. However, this was before the BOE saw inflation jump from 10.1% YoY in September to 11.1% YoY in October. The November reading is due out on Wednesday, the day before the BOE meeting. Expectations are for CPI to fall to 10.9% YoY. If the reading is higher, could the MPC surprise markets and hike by 75bps? It’s not likely right now as the UK is also dealing with the strong potential for strikes across the nation. Nurses, rail workers, Border Force, and others are threatening to strike over conditions and pay. The UK has summonsed the military and civil servants to try and fill some of these positions over the holidays, but could the BOE hike less than expected in order to make the situation a little better? In addition, the BOE will have a host of data to look at before it meets on Thursday, including October GDP (which was +0.6% MoM vs +0.5% MoM expected), the UK CPI, and jobs data.  On Friday, the day after the meeting, the UK will release Retail Sales.

The FOMC also meets this week to discuss interest rate policy. In a speech at the Brookings Institute on November 30^th, Fed Chairman Jerome Powell made it clear that the FOMC is looking to reduce the pace of interest rate hikes at its meeting on December 14^th. Powell noted that the ”Fed could slow the pace of rate rises as soon as the December FOMC meeting.” He also said that “relying less on forecasts means doing more risk management and slowing down rate rises at this point is a good way to balance the risks of overdoing hikes.” After last week’s PPI came in hotter than expected, yields and the US Dollar went bid on the possibility of a more hawkish Fed. However, by the end of the day, they had given back all their gains. On Tuesday, the US will release November CPI. Expectations are for 7.6% YoY after last month's surprise print of 7.7% YoY (much lower than expected). Could this print change the Fed’s decision as to how much it will hike rates? Probably not. However, it may affect the Summary of Economic Projections (dot plots), which gives the committee members forecasts of GDP, inflation, and interest rates.

GBP/USD had been moving lower since February 2021 when the pair reached a high of 1.4250. However, it wasn’t until April 2022, when the pair broke 1.3000, that the movement began to pick up steam to the downside. GBP/USD began to quickly move lower in an organized channel until September 21^st, as Liz Truss was about to take over as Prime Minister. However, once Truss revealed her “mini-budget”, the pair fell to all-time new lows at 1.0357. The BOE stepped in and saved the bond market, which then brought GBP/USD higher. Since then, the pair has been moving higher in an ascending wedge formation and is currently trading near the apex, just below the 50% retracement level from the highs of February 2021 to the September 26^th lows, near 1.2299.

(Click on image to enlarge)

Source: Tradingview, Stone X

On a 240-minute timeframe, GBP/USD is trading right at the bottom trendline of the ascending wedge. If the pair breaks the trendline and moves lower, the first support is at the confluence of the 200 Day Moving Average and the lows from December 7^th between 1.2106 and 1.2111. Below there, price can fall to the psychological round number support level of 1.2000, then the lows of November 30^th at 1.1900. However, if the CPI or the BOE are hawkish, GBP/USD may continue higher. The first resistance level is the highs from December 5^th at 1.2344, then the upper trendline of the ascending wedge near 1.2475. If the price continues above there, the next level of resistance is at the highs of May 30^th at 1.2660.

(Click on image to enlarge)

Source: Tradingview, Stone X

With the US CPI, FOMC, UK CPI, BOE, and other second-tier data scattered throughout the week, GBP/USD could be extremely volatile. Watch for the “Dot Plots” from the Fed to see where members think interest rates are headed next. This may be the catalyst for the next direction for GBP/USD!

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