Keep an eye on this space because the GBPUSD could turn volatile over the next few days!
Market players will be served a cocktail of key economic reports from the UK and potentially more political drama at Westminster. On top of this, expectations continue to mount over the Bank of England raising interest rates in February to tackle rising inflationary pressures. The argument for higher interest rates may receive a boost if the pending labour market and CPI data meet or exceed expectations. Looking at the political front, Prime Minister Boris Johnson remains under pressure to resign over ‘partygate’ – a development that could weigh on sterling down the road.
All in all, there is plenty on the plate for sterling in the week ahead. It may be wise to fasten your seatbelts in preparation for volatility.
Before we sink our teeth into the key themes and economic reports that may inject life into the pound, it is worth keeping in mind that it has appreciated against most G10 currencies year-to-date.
Briefly looking at the technical picture, prices remain in a range on the monthly timeframe with strong support at 1.3300 and resistance at 1.3800. However, the technicals and fundamentals are swinging in favour of bulls with a break above 1.3800 signalling a move towards 1.4250.
UK CPI under the spotlight…
Over the past few weeks, the pound has displayed sensitivity to inflation and rate hike expectations. This sensitivity may be on show this week if the pending data influences rate hike bets.
On Tuesday, all eyes will be on the November labour market report which should provide a clearer picture of the labour market following the end of the furlough scheme. Investors will direct their attention to the December inflation figures on Wednesday which are forecast to rise 5.2% year-on-year – its highest level in 10 years. To end the week, the retail sales figures for December will be published with markets expecting sales to rise 3.4%, a drop from the 4.7% in November.
Should the pending inflation data and labour market report illustrate further signs of rising inflation and tightening labour market conditions, this may fortify expectations for tighter policy. Markets are currently pricing in an 89% probability of a 25bp rate hike at the 3 February meeting.
Watch out for political developments
UK Prime Minister Boris Johnson remains in the headlines for all the wrong reasons.
The PM has been facing calls to resign amid the ongoing ‘partygate’ scandal. Things are bound to get spicy as a no confidence motion in Boris Johnson has already been tabled by the Liberal Democrats. While a majority of Tory MPs remain on the side-lines until the results of a formal investigation are released, it has been reported that as many as 30 letters of no confidence in Boris Johnson have been submitted. A total of 54 letters of no confidence would have to be submitted to Sir Graham Brady, chairman of the 1922 Committee of backbench MPs, for a vote to be held.
Pound points north but throwback pending?
Things are looking interesting for the GBPUSD on the weekly charts following the weekly close above 1.3600. The strong breakout above this point could encourage an incline towards 1.3900. If bulls are unable to keep above 1.3600, we could see a decline back towards 1.3200.
On the daily charts, prices remain bullish, however the 200-day Simple Moving Average is acting as a major barrier for bulls to conquer. Beyond this point, prices may jump towards 1.3830 and 1.3900. In the meantime, the GBPUSD could be experiencing a technical throwback with 1.3600 acting as a key level of interest. Should this level prove to be reliable support, a move back towards 1.3700 could be on the cards. Alternatively, a decline below 1.3600 may open the path 1.3450 and lower.
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