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Is a GBP Breakout on the Horizon?

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August 1, 2017 By: , No Comments

The Bank of England (BoE) will be announcing its interest rate decision on Thursday, August 3, 2017 at 11 AM GMT. Analysts are expecting the bank rate to remain at 0.25%, but Governor Mark Carney may surprise markets.

On 15 June 2017, the BOE voted by a margin of 5:3 to maintain the bank rate at its record low of 0.25%. Dissent among MPC (Monetary Policy Committee) members rattled currency traders. Demand for the GBP soared, spurred by weakness in the US dollar. The Bank of England decided to continue purchasing government bonds worth £435 billion, and corporate bonds at £10 billion. The big question remains: How will policymakers vote this week with rising interest rates and falling real wages?

By the close of trade on Monday, 31 July 2017, the GBP/USD pair was surging at 1.3207. Considering that the 52-week trading range of the pair is 1.1952 on the low end and 1.34427 on the high-end, it is bullish. For GBP traders, these are exciting times. Markets are looking increasingly towards the MPC meeting on Thursday for an indication of which way to go over the short-term. If current trends are anything to go by, the bulls are charging. Last time the MPC met, 3 hawks powered the sterling’s rise.

 

How to tell which way the GBP/USD pair will move?

The US dollar index (DXY) is currently trading at 92.85, down 0.50%, or 0.47 points (July 31, 2017). The performance of the US dollar index mirrors the performance of the USD against 6 major currencies including the SEK, GBP, CAD, EUR, JPY and CHF. It is notable that the DXY is at the lower end of the 52-week low which currently stands at 92.78. The 52-week high of the US dollar index is 103.82.

For the year to date, the DXY is down 9.31%, much like the USD against other currencies. The performance of the cable is also being influenced by improvements in the economy in Europe. European Central Bank president, Mario Draghi, has indicated that the massive economic stimulus could soon be tapered.

US economic data remains lacklustre, and this is not helping the cause. Growth came in under expectations, and employment data failed to ignite any optimism. During Q1 2017, US GDP grew 1.2%, followed by Q2 2017 growth of 2.6%. Other disappointing data in the form of the Employment Cost Index rose by 0.1% less than forecast (at 0.5% versus the expected figure of 0.6%).

Other factors are also hampering the US economy, such as the Thursday night vote by Senate Republicans which failed to repeal the Obamacare bill by 49-51. Further, US President Donald Trump approved heavy sanctions against Russia for meddling in US elections. If the current trends with the US dollar index are anything to go by, we could breach the 13-month low in short order.

 

Will Super Thursday live up to its reputation?

All signs indicate that the GBP will enjoy strong momentum heading into Thursday. Already, it has broken through its 10-month high, and is barrelling towards the best levels since the Brexit referendum. Nobody knows quite which direction Carney and the MPC members will vote come Thursday. In June, the UK economy lost some momentum, with slow growth in unsecured lending and mortgage approvals. However, the GBP was not adversely impacted by this data.

Brexit concerns remain, however. For now, currency traders have subjected the USD to strong sales, even though the bullish performance of the GBP has little to do with fundamental factors.

 

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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.

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