Outlook and research: GPB – Trade Setups
The USD sold off at the end of last week after the Fed meeting and GBP/USD moved sharply to the upside but we are now near a key technical level of resistance and we see the GBP has overbought in the short term and think a correction to the downside is likely. Our view of the fundamentals, sentiment, and key technical levels to watch below…
USD Down On Perception Fed Will Not Cut Stimulus Soon…
The market took the Fed as dovish last week and the market view is that a reduction in stimulus is a long way off but is it?
On Friday influential St Louis Federal Reserve President James Bullard Noted that he thinks financial markets “are very much ready for a taper,” noting that he would prefer to begin the process of scaling back on Fed’s $120 billion a month in Treasurys and mortgage-backed securities this fall and finish by the end of the first quarter of 2022.
The market actually thinks the Fed won’t start until next year with forecasts being for it to start at the end of the first quarter – the market has become addicted to stimulus and doesn’t want to see it end but it has too as inflation is still running above economists’ forecasts. The Fed will probably use the August Jackson Hole meeting of central bankers to signal that stimulus will be dialled back.
Jackson Hole has been used in the past to indicate big changes in Fed policy and think they will use it to warn the markets that tapering is coming which could start as early as September. We think the reaction against the USD is overdone, expect it to rally back and view the dovish market view as discounted.
Bank of England Meeting
On the other side of the pair in terms of the GBP, we have seen a lifting of lockdown, economic growth is strong, and inflation is on the rise which has led to the market seeing chances of a rate hike during the summer of 2022.
In the shorter term, the Bank of England’s £875 billion bond-buying program is expected to end next year – A hawkish Bank of England is now discounted but we think the Bank of England will remain cautious:
“The MPC emphasized that it will, as always, focus on the medium-term prospects for inflation, which it continues to believe will be shaped by the amount of slack in the economy, especially in the labour market. Most members remain concerned that labour market slack will increase as the furlough scheme is wound down at the end of September.” (Pantheon Economics)
The bad news for the USD and the good news for the GBP is discounted, GBP/USD has rallied to a big level of resistance which in our view could present an attractive risk to reward swing trade short – key technical levels to watch below…
GBP/USD Technical Analysis
On the chart below, we have seen the GBP rally up above the 1.3900 level and fall back which is also the 20 week moving average (the green line) behind it we have a major institutional hedging level 1.400 which we don’t expect to get taken out.
On the daily chart, after pushing up above the 1.3900 level prices failed to reach and test the 1.400 level and we are now trading back at 1.3900. Any rallies to 1.400 are a sell on weakness into the level and if we don’t rally we would sell a breakthrough Fridays low – we are looking for a sell off back to big support levels at 1.3700 and 1.3600.
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