What a week. Feels like I’ve been saying this quite a lot recently, but it’s been another action-packed session for financial traders. We’ve seen rate hikes from the Fed, the SNB, Norges Bank and the BOE as well as the first currency intervention from the BOJ in over 30 years. The developments have naturally caused plenty of market volatility this week and chatting with traders about the key moves they’ve been focused on, there’s been plenty to choose from. However, away from some of the wilder market swings we’ve seen it seems the move which has drawn the most focus is the continued sell-of in GBPUSD. So, let’s take a look at what caused this move and, as ever, if you caught it? Well done! If you missed it? There’s always next week.
What Caused the Move?
There are two key elements to the sell off in GBPUSD this week and the first is the September FOMC held on Wednesday. The Fed was seen pushing ahead with a further .75% hike, confirming the market’s hawkish expectations, along with signalling the need to continue with rate hikes while it battles inflation. The tone of the Fed’s outlook on inflation was once of concern and uncertainty with Powell conceding that elevated inflation looks likely to persist longer than expected. In light of these comments, the market is firmly expecting further rate hikes from the Fed into next year. Market reaction has been broadly bullish for USD with the Dollar index breaking out to its highest levels since July 2002.
Following the Fed, we then had the September BOE meeting on Thursday. The BOE appeared to underwhelm traders by announcing a .5% hike, choosing not to go for a larger .75% hike. The BOE has been accused of being slow to act on inflation and lacking the decisiveness of other central banks and this lower rate hike seemed to feed into this narrative. Additionally, alongside the rate hike, the BOE was seen sounding the alarm over the economy citing that the UK was likely already in recession and warned that the slowdown might well deepen as the BOE pushes ahead with further rate hikes in the coming months.
Traders are now awaiting the details of PM Liz Truss’s mini-budget which will be unveiled today. While the budget is expected to be pro-growth, there are fears that the proposed spending increases and tax cuts will simply feed into higher inflation, putting further pressure on the BOE to hike rates, ultimately resulting in lower growth over time.
The sell-off in GBPUSD this week has seen the market breaking below the 1.1474 level, trading down to fresh lows for the year. With MACD and RSI bearish, the focus is on a continuation of the bear channel towards the next key support at the 1.1063 level next. Bulls need to see a break of the channel top and 1.1764 level to alleviate bearishness near-term.