GBP/USD still has room to retrace back to 76.4% Fibonacci

[MongiIG]

Central bank meetings will be in focus this week with the Federal Reserve and Bank of England taking centre stage.

 

 

Daniela Sabin Hathorn | Presenter and Analyst, London | Publication date: Monday 13 June 2022 

Fed and BoE preview: how large will the rate hikes be?

Central bank meetings will be in focus this week with the Federal Reserve and Bank of England (BoE) taking centre stage.

Hawkish expectations are as high as ever at present as other banks around the world continue to hike rates to control soaring inflation. Markets are pricing in a sure chance of policy tightening from both the Fed and the BoE, but the messaging around future guidance is going to be key to determine market reactions.

Take the European Central Bank (ECB) for example, which said all the right things to convince the markets that it is committed to ending the Eurozone’s inflation problem, and yet still the euro ended the day sharply lower.

The issue likely arose from the lack of commitment from ECB president, Christine Lagarde, in the press conference, because despite announcing the end of asset purchases, committing to a 25-basis point (BPS) rise at the next meeting, and hinting at a 50bps hike in September, she still gave herself wiggle room to see how the economy evolves in the next few months.

The ECB also faces the issue of fragmentation within the Eurozone as economies within the block suffer differently, but the overall feeling is that markets expect no less than a firm stance from policymakers regarding inflationary pressures. This is a lesson to be had heading into the meetings this week: to not be fooled by the announcement of a rate hike, the key being to dig a little deeper into the messaging from Fed chair, Jerome Powell and BoE governer, Andrew Bailey.

As far as expectations go, its likely we see a 50bps hike from the Fed – as hinted in their previous meeting – and a 25bps hike from the BoE.

Market pricing is in line with 50bps from the Fed, with another 50 in July and September, taking the base rate to over 2% in the next two months.

The question is whether the Fed will take a pause for breath after that as the base rate starts to fall within their “neutral” territory, but market pricing after last week’s US consumer price index (CPI) data now shows a further 50bps hike in November.

Source: Refinitiv

Source: Refinitiv

 

The surprise rise in CPI growth means there is no sign that price pressures are easing. The May reading released on Friday showed headline inflation at a 40-year high at 8.6%, with monthly core CPI growing another 6%, the same growth seen in April despite economists expecting it to drop slightly to 5.9%.

GBP/USD

The US dollar is likely to remain supported throughout the week given the risk-off move sweeping the markets once again. The outcome of the Fed meeting is likely to be limited to the current trend given the current expectations that are being priced in and the fact that sentiment around the US economy is a little stronger than in other countries.

For the BoE though, there is a higher risk of market disappointment. Consumers are already concerned about an impending recession, with the pound heading back towards two-year lows against the dollar.

When the Monetary Policy Committee (MPC) voted to raise rates in the May meeting we saw GBP/USD retracing over 3.7% in the days after the announcement, as Bailey failed to inspire confidence into markets that he will manage inflation expectations effectively.

This time around the market is facing the same risks so focus will once again be firmly placed on Bailey’s presser if the rate decision falls in line with expectations. If that is the case, GBP/USD still has some room to retrace back to the 76.4% Fibonacci (1.2080) before the selloff starts to look overdone.