The Bank of England meets on Thursday this week to discuss interest rate policy.  Markets are pricing in nearly a two-thirds chance of a 75bps increase, which would bring the key rate to 3%.  The latest inflation reading for September rose back to July’s level as 10.1% YoY, which was the highest level in 40 years.  The Core CPI reading in September rose to its highest level ever at 6.5% YoY.  The expectations for the increase have been rather erratic over the past month, as former Prime Minister Liz Truss unveiled her “mini-budget” proposal, which sent 30-year Gilts above 5% and GBP/USD to its lowest levels ever.  The BOE entered the Gilt market and saved the day.  Liz Truss resigned.  Gilts and the Pound have recovered.  Rishi Sunak was selected to be the new PM. One of Sunak’s first orders of business was to push back the Autumn budget statement from October 31^st to November 17^th to try and find 50 billion Pounds in tax revenues.  Enter the BOE rate decision this week.  With the fiscal uncertainty before November 17^th, the BOE may want to tread lightly as to not step on Sunak’s toes.  Although inflation is extremely high, fears of a recession are looming and the BOE may not want to tip the scale ahead of the Autumn budget.  At the same time, traders need to watch for comments of QT. Gilts sales are expected to begin November 1^st.  However, traders need to watch the duration and the pace of bond sales.  Also, with some other central banks “pivoting”, such as the RBA and the BOC, will the BOE feel the need to cut back as well.  Chances are that the BOE won’t be pivoting as rates are still too low to dampen at 10%+ inflation reading.

The US FOMC meets on Wednesday this week to discuss interest rate policy.  A 75ps rate hike is nearly 90% priced in according to the CME FedWatch Tool. Last week, the Wall Street Journal’s Nick Timiraos (who is said to be a Fed-insider) tweeted that “the Fed isn’t data-point dependent and the decision for next week of 75bps seems unlikely to change…”. Although CPI dipped slightly in September to 8.2%, it is still much higher than the Fed’s 2% target.  In addition, the US has still been producing strong jobs reports, with expectations for the Non-Farm Payroll for October due out on Friday at +220,000.  This will give the Fed the confidence to hike by 75bps to bring the Fed Funds rate to 4%.  However, Timiraos also pointed out that it could be heavily discussed at this meeting whether the Fed should begin to slow the pace of rate hikes in December, perhaps to 50bps.   This would bring the target rate to 4.5%, with many economists believing the terminal rate will be 4.75% or 5%.  Watch the statement and the press conference closely for clues as to when and if a pivot lies ahead.

GBP/USD broke below 1.3000 on April 22^nd and had been moving lower in a descending channel until September 21^st, when the pair broke below the bottom trendline near 1.1360.  Two days later, Liz Truss announced her “mini-budget” proposal, and the pair fell to a low of 1.0834.  The following Monday morning, GBP/USD reopened and fell to its lowest level ever, near 1.0357, before the Bank of England entered the Gilt market and saved the economy from collapsing.  GBP/USD has been bouncing since in an ascending wedge formation as price traded to a near term high of 1.1645 (just above the 61.8% Fibonacci retracement level from the highs of August 10^th to the lows of September 26^th at 1.1543).  The pair is currently approaching the apex of the wedge.

Source: Tradingview, Stone X

There is a confluence of support sitting just below at the bottom upward sloping trendline of the ascending wedge, the highs of October 17^th, and the 50 Day Moving Average between 1.1440 and 1.1463.  Below there, price can fall all the way to the 38.2% Fibonacci retracement levels from the low of September 26^th to the highs of October 26^th at 1.1153, then bottom trendline of the long-term channel near 1.1110.  However, if the confluence of support holds and price bounces, first resistance is at the October 26^th highs of 1.1654.  Above there, GBP/USD can move to the top trendline of the ascending wedge at 1.1690, then the top downward sloping trendline of the long-term channel near 1.1900.

Source: Tradingview, Stone X

With both the FOMC meeting and the BOE meeting this week, GBP/USD could be volatile.  It seems likely that both central banks will hike 75bps at their respective meetings, however, the statements and the press conferences need to be closely watched for any hints of a “pivot” in monetary policy moving forward.

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