What the pound needs to keep going and what will sink it
As I type GBPUSD is climbing to 1.5350 as we tick down to the MPC announcement. It's possible we're just seeing the same old pattern of getting overexcited in the run up to a central bank meeting
As Mike noted there's two factors at play
- Is the BOE going to hike today?
- Will we see a change in votes?
Firstly it's 99% certain they won't change policy so it's the votes that are the risk.
What has changed since the last meeting?
The economy is looking softer and we've the one saving grace was the IP report yesterday. Retail sales were so-so in Aug. On the headline balance there's not much to get their teeth into. Looking deeper we have seen a strong continuation in rising wages led by the private sector. The labour market may be flattening in terms of unemployment and the claimant count, but that's to be expected after a strong two year run, and is all part of the economy normalising
"Global worries" is the term everyone is using yet this isn't new news. It's been going on for a while now yet wages are still rising, house prices are rising, mortgage approvals are rising, skills shortages are rising. All the things the BOE should be focused on are going in the right direction, bar inflation. And on that front they can look through lower inflation for all the reasons I've just listed.
I wrote after the last labour report that I thought there was enough in it for some of the voters to seriously think about moving to hike. I've seen nothing recently to change that view but it does go against the market's current view and so that is where the biggest risk for the pound is. If we do see more members jumping across the fence then the pound will fly and depending on how many, we could get a big move.
It won't be too much of a shock if we see Weale coming across to join McCafferty so the real move will come if we get any others. The likelihood is that we get an almost word for word and vote repeat of last month's meeting and that may put some disappointment into the pound. The switch from there to the US could see additional pressure coming in if we see the dollar getting bullish into the Fed minutes
Shorts are most at risk right now and longs need to be cautious about seeing their gains evaporate. The pound is moving in waves, days of downward moves followed by days of upward moves, and we're in one of those uptrends right now
Longs should keep an eye on the 50 fib of the Sep drop from 1.5675 at 1.5380, and then the 61.8 fib at 1.5445. Shorts should watch the 1.5285/90 level then 1.5240. These are the levels that if broken, will reverse or continue this current five day trend and spell doom for either side
GBPUSD H4 chart
