Is bearish cloud covering the Pound ahead of BoE monetary policy?

The Fed meeting is now behind us and it was turned from a “Non-event” into an “Eventful” one as committee members along with governor- Jerome Powell turned hawkish by accepting the fact that the ongoing inflation is sustainable over the long term, which will help Fed to achieve their inflation target levels and shall go for a rate hike sooner-than-expected.

The same was perfectly mentioned in our recent CNBC report dated 15th June 2021 (Just before Fed meeting day) that the Fed could come up with a higher revision of inflation and growth forecast. Well, that helped Dollar index to achieve our target of 91.50 within a day. Moving forward, we expect that ‘more Fed members to acknowledge the growth and inflation, more the rally will continue towards our target of 93.00 to 93.50 levels’.

The Pound was amongst the most depreciating currency post announcement, down by 2.11 percent over last week. Now, the second most watchful event- BoE monetary policy is due on 24th June. The question ahead of the meet is- “Will Birds of a feather flock together”, means BoE who has a similar kind of interest will also join Fed and turn hawkish? Even if they join, will other fundamentals be allowing the Pound to take a breather and bounce? Let’s visit key points that could be deciding factors for the outlook on the Pound.

Rally in US Dollar index:

The Fed ‘Dot Plot’ in the recent Fed meet suggested 13 members penciled in two-hike in 2023 and a few are in favor of the 2022 hike as well. The bond yield didn’t rise in line with USD due to the shift of capital from risk-on to risk-off and expectations were already discounted into it. Nonetheless, the US dollar index has boarded the flight and the next stop is higher than the current levels only, probably 93-93.50 levels. If that is taken out and Fed comments boldly on rate hikes then it will be unstoppable upto 96 – 96.50 levels. This will be surely bearish for the Sterling.

Reopening extension overshadows cheerful economic data

The economic data from the UK has been on an upbeat mode, majorly job reports in which hourly earnings rose to 5.6 percent, claimant count (Jobless claims) deepened further & unemployment rate fell to 4.7 percent. Further, inflation jumped to 2.1 percent – above the BoE’s target of 2.00 percent. But retail sales data disappointed the market a bit. Overall, one can say that the economy is on the right track- thanks to a higher vaccination drive. Further, UK is amongst those countries that have surpassed 65 percent of their population vaccinated. However, the flipside of the coin is dominating right now which suggests the faster spread of a new variant – ‘Delta’ across the UK and now the country is having more than 10,000 cases per day. Unfortunately, UK had to extend the reopening plan for another four-week up to 19th July. The variant hurdle is likely to put further pressure on the Pound and thus upside seems likely limited.

Pressure is mounting on BoE to scale back but Brexit looms

After Fed, now it’s time for BoE to present their stance on the monetary policy this week. However, BoE is not facing the same pace of price rises as the Fed. But they have already signaled a greater willingness to dial back its emergency stimulus by cutting the pace of bond buying at its previous meeting. Another issue that lies in front of BoE is the Brexit deal. Overall, BoE is not expected to turn much hawkish like Fed but a slightly higher revision of inflation and growth forecast could be seen. Overall, BoE could be a non-event for the market and thus participants could take cues from bullish DXY.

Lingering Brexit concern over Pound

The G7 meeting was seen turning into a Brexit meeting where the EU and UK both were pointing at each other on the deal. EU chief reiterated that they are ready to act “firmly and resolutely” if the UK fails to honor its commitments under the divorce deal concerning Northern Ireland (NI) protocol. And UK reverted with a strong message that NI interest should be well protected and the deal should be renegotiated for the same. Overall, this issue seems uneasy and EU-UK trades are likely to be hit badly as signals are ominous.

Technical Tone:

Last week, the bearish technical setup was observed over GBPUSD weekly chart after breakdown below crucial trendline support of 1.4000. In the near term, any bounce towards 1.4000 will be a selling opportunity for the immediate target of 1.3680 and further, there is a higher probability that the pair could move towards the 1.3380-1.3520 zone. Overall, the bias for the GBPUSD seems downside over the short and medium term.

Outlook:

Fundamentally, just positive economic data are not enough to establish a bullish trend for the Pound. The BoE meet likely to remain non-event and they could postpone their hawkish tone for the next meet after the recent variant. Additionally, the US economy seems much stronger than the gloomy Brexit tied UK economy. And hence, the outlook on the GBPUSD remains bearish. We expect that any retracement towards 1.4000-1.4050 will welcome bears once again and the pair could resume its southward trend towards 1.3680 over the short term and 1.3520 to 1.3380 over the medium term.

-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.