Trade Of The Week: Heavy Event Week To Trigger GBPUSD Breakout?

Watch this space as the GBPUSD could enter into the holiday season with a bang!

Later this week, investors will be served a super combo of top-tier economic data and central bank meetings featuring not only the Federal Reserve (Fed) but European Central Bank (ECB) and Bank of England (BoE). With so much going on over the next few days, volatility could be the name across currency, commodity, and equity markets.

Our focus falls on the GBPUSD which is up roughly 10% quarter-to-date. After staging a powerful rebound back in late September, prices have been supported by fundamental and technical forces. With the dollar losing its grip on the FX throne as aggressive Fed rate hike bets cool, this has fuelled sterling’s upside gains. The currency pair is bullish and could experience a breakout with the right fundamental drivers. Before we discuss what to expect from the Fed and BoE this week, it is worth keeping in mind that the USD has depreciated against every single G10 currency since the start of Q4.

On the monthly charts, bulls seem to be stealing more control with prices currently testing a sticky level around 1.2300.

The same can be said on the weekly timeframe with 1.2300 just below the 50-week SMA. Nevertheless, prices are still bullish as there have been consistently higher highs and higher lows.

Whatever the outcome of the policy meetings between the two central banks, it most likely will set the tone for the GBPUSD for the rest of 2022.

What to expect from the Fed?

The Fed is widely expected to shift into lower gear on rates in December, hiking by 50 basis points compared to the 75-basis point increases they’ve undertaken over the last four policy meetings.

Indeed, signs of easing inflationary pressures have reduced the pressure on the Fed to raise interest rates aggressively. On top of this, such a move would be consistent with recent dovish speeches from Fed officials, including Jerome Powell. The million-dollar question is what the Fed does at its next policy meeting in February 2023. Jerome Powell’s press conference and information from the December meeting could provide investors with some important insight.

Before the heavily anticipated meeting on Wednesday, all eyes will be on the latest US inflation figures on Tuesday. Inflation is expected to have slowed to 7.3% in November compared to the 7.7% witnessed in October. A figure that meets or prints below expectations may further pare back interest rate hike bets, weakening the dollar. Alternatively, a hot print could result in the Fed raising rates for longer than anticipated – boosting dollar bulls as a result.

How about the BoE?

Markets widely expect the Bank of England to hike rates by a further 50 basis points this month.

Early signs of easing inflationary pressures have reduced the pressure for the BoE to move ahead with another jumbo 75 basis point rate hike. Indeed, the latest UK CPI data for November is expected to show inflation cooling to 10.9% on an annual basis. If expectations become reality, this may suggest that inflation may have peaked at 11.1% back in October. Nevertheless, consumer prices is still well above the central bank's 2% target – forcing the BoE to continue raising interest rates in 2023.

It may be wise to keep a close eye on the latest UK jobs, retail sales and PMI figures which may offer additional insight into the health of the economy. But given how the UK economy is likely in recession, the central bank is trapped between a rock and a hard place on rates and economic growth. Ultimately, investors will closely observe the meeting for clues on the pace of future rate hikes in the New Year.

GBPUSD gearing to push higher?

A weaker dollar remains one of the major driving forces behind the GBPUSD’s upside momentum. However, prices remain within a minor range with support at 1.2120 and resistance at 1.2300.

The currency pair is firmly bullish on the daily charts as there have been consistently higher highs and highs and higher lows. Prices are trading above the 50, 100, and 200-day SMA while the MACD trades above zero. A solid breakout and daily close above 1.2300 may open the doors towards 1.2460 and 1.2650. Alternately, a move back below 1.2120 (where the 200-day SMA resides) could signal a selloff towards 1.1900 and 1.1750, respectively.

Federal Reserve Bank of England inflation rate hike Recession Jerome Powell GBPUSD