Week Ahead: BOE to sustain GBPUSD above 50-day SMA?

July 29, 2022

The first week of August is set to feature a host of key events that could shake up markets, including the latest US jobs report, fresh Wall Street earnings, and perhaps even a new OPEC+ deal.

Still, the central bank watch remains front and center as the Reserve Bank of Australia and Bank of England could hike their respective rates by another 50 basis points each in the coming week.

Here are the key releases and events that we’re keeping an eye on for the week ahead:

Monday, August 1

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AUD: Australia July inflation
CNH: China July Caixin manufacturing PMI
EUR: Eurozone June unemployment rate
USD: US July ISM manufacturing data

Tuesday, August 2

AUD: Reserve Bank of Australia rate decision
USD: Speeches by Chicago Fed President Charles Evans, St. Louis Fed President James Bullard
Starbucks 2Q earnings
BP 2Q earnings

Wednesday, August 3

NZD: New Zealand 2Q unemployment
AUD: Australia Q2 retail sales
CNH: China July Caixin services PMI
EUR: Eurozone June retail sales, PPI; Germany June external trade
USD: US June factory orders, July ISM services index
Brent: OPEC+ meeting
US crude: EIA weekly oil inventory report

Thursday, August 4

AUD: Australia June external trade
EUR: ECB publishes Economic Bulletin; Germany June factory orders
GBP: Bank of England rate decision
USD: US weekly jobless claims; Cleveland Fed President Loretta Mester speech
Alibaba 2Q earnings

Friday, August 5

AUD: RBA releases Monetary Policy statement, including updated economic forecasts
GBP: BOE Chief Economist Huw Pill speech
EUR: Germany June industrial production
CAD: Canada July unemployment
USD: US July nonfarm payrolls

GBPUSD traders will be firmly focused on whether the Bank of England’s policy decision could help keep “cable” above its 50-day simple moving average (SMA), provided this pair can first see a meaningful breach of this immediate resistance level.

At the time of writing, markets are forecasting just a 53% chance of a 50bps hike by the BOE at its August policy meeting; those odds are a far cry from the 84.5% back at the start of July.

A 50bps hike by the BOE could help lift Sterling, provided policymakers can not only prove doubters wrong and trigger its largest hike in 27 years, but also point to more larger-than-usual hikes in the pipeline.

After all, with the UK consumer price index (CPI) already registering at 9.4% in June – its highest CPI print since February 1982 – that’s reason enough for the central bank to “act forcefully”. UK inflation is also forecasted to go on to post double-digit figures in Q4.

Yet, markets have enough reasons to doubt that the UK’s central bank can indeed follow through with this “forceful” stance.

UK retail sales have been contracting while consumer confidence is at its lowest in about five decades. Workers across various industries have been on strike as wages struggle to keep up with soaring inflation. Since May, the BOE already issued a grim outlook for the UK economy, forecasting a recession for 2023.

Sterling’s upside is being capped by the markets’ pessimism about the UK economy’s ability to withstand interest rates moving much higher.

Such doubts suggest that GBPUSD may do no better than the mid-June cycle high around 1.24 over the near-term, provided the US dollar remains soft in the interim.

If markets instead seize on BOE hesitance to send UK rates higher at this August policy meeting, then the 1.20 psychologically-important level could beckon once more for GBPUSD.

Article by ForexTime