GBP/USD has been one of our most popular pairs to discuss over the last month. When Chancellor Kwasi Kwarteng announced the plans for Prime Minister Truss’s new “mini-budget” program, markets were concerned as to where the money would come to fund it. The Bank of England had been slowly raising interest rates and investors were weary that the government would now have to borrow money at much higher rates. As a result, the Gilts and the Great British Pound got hammered. A few days later, the BOE intervened in the Gilt market, which brought yields lower the value of the Pound higher. The central bank said it would continue to intervene in the market as necessary, buying up to 5 billion GBP per day worth of Gilts through October 14^th, in order to keep liquidity in the markets.

On Monday, the BOE gave an update as to how it would continue addressing concerns beyond October 14^th. The Central Bank said it would raise the amount of Gilts it would buy per day through October 14^th from 5 billion Pounds to 10 billion Pounds. (Thus far, the BOE has only purchased 4.6 billion Pounds of Gilts, in total, out of the 40 billion Pounds it said it could buy). In addition, the BOE launched a longer-term facility through mid-November to enable banks to ease liquidity pressures in Liability-Driven Funds. This was done so that these funds have the liquidity needed to unwind certain positions over the next few weeks. The BOE meets again on November 3^rd.

In addition, this week the UK releases a plethora of data, including the August GDP, Trade Balance, Industrial Production, and Manufacturing Production. However, the most important piece of data this week from the UK will be the Claimant Count for September. Expectations are that 10,000 new claimants were added to unemployment benefits vs 6,300 in August. August was the first increase since February 2021. 

After pulling back from 20-year highs, the US Dollar found its strength. US Non-Farm Payrolls were in-line with expectations at +263,000. In addition, the Unemployment Rate down ticked from 3.7% to 3.5%. The jobs data on its own should give the Fed confidence to hike by 75bps at its November 2^nd meeting. This week the US will release inflation data. PPI, CPI, and the inflation components of the Michigan Consumer Sentiment will all be released this week. The headline CPI print is expected to downtick from 8.3% YoY to 8.1% YoY. However, the Core CPI is expected to uptick to 6.5% YoY from 6.3% YoY. If the data is stronger than expected, watch for the US Dollar to continue higher, as the probabilities increase for a 75bps hike at the next meeting. If inflation is much stronger, traders may even begin pricing in a 100bps hike!

GBP/USD began trading aggressively lower in a downward-sloping channel once the pair broke below 1.3000 on April 22^nd. On September 21^st, GBP/USD pierced the bottom trendline of the channel. However, it wasn’t until September 23^rd that the pair broke aggressively through the bottom of the channel. On Monday, September 26^th, GBP/USD had traded to a low of 1.0357, as the BOE intervened in the Gilts market, and the GBP recovered. Over the next 6 days, GBP/USD bounced near the 61.8% Fibonacci retracement level from the highs of August 10^th to the lows of September 26^th, near 1.1495. Since then, the pair has been on the move lower once again.

(Click on image to enlarge)

Source: Tradingview, Stone X

On a 240-minute timeframe, GBP/USD has pulled back to the 38.2% Fibonacci retracement level from the September 26^th lows to the October 5^th highs near 1.1054.  Below there, the pair can trade to horizontal support and the 50% retracement level from the same timeframe near 1.0918/1.0931, and then the 61.8% Fibonacci timeframe at 1.0782.  If the pair bounces higher, the first horizontal resistance is at 1.1226, then the October 5^th highs at 1.1495.  Above there, GBP/USD can move to the September 22^nd highs at 1.1738.

(Click on image to enlarge)

Source: Tradingview, Stone X

With the continued uncertainties surrounding BOE intervention, along the US release of inflation data this week, GBP/USD could be in for some volatility.  Watch Gilts to see if they reach new highs. If so, the BOE may intervene once again and the Pound could move lower.  Also, if the US CPI data is stronger, the US Dollar could be on the move higher, which could send GBP/USD lower!

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