Analysis | September 22, 2021

KTM FX Weekly: Bullish pattern vs bullish GBP views

As the daily stochastic remains solid and the weekly stochastic has picked up markedly, the risks of a new decline to supports located at 0.8500 and 0.8450 have eased dramatically in the next few days.

We favor new rebounds to resistances at 0.8615 ahead of 0.8670. A break of these last barriers would give an impulsive move higher, paving the way for a more pronounced rally to the resistances at 0.8720-0.8730.

The supports stand at 0.8560, 0.8500, and 0.8450. Technically, the cross is trading above 20MA weekly for the 1st time since January 2021. A weekly close above 0.8615 could produce a relief rally.

Looking at the positioning side, GBP grabs a bullish view. Investors flip back to bullish GBP view, as per Danske Bank’s IMM report.

So far, EURGBP is developing an A-B-C pattern, and we will trade between 0.8450-0.8660 ahead of this week’s BoE meeting and the German election.

The week ahead, we have five central bank meetings which can alter the G10 landscape. In the case of a hawkish tone from BoE, we expect the cross will end at 0.8470-0.8450.

We and the market expect the BoE to keep its stance in the September meeting. Economic developments in the UK have changed since the last meeting. We are constantly hearing the stagflation risk scenario.

Looking at the data side since the last meeting, the unemployment rate dropped to 4.6%, besides inflation reading printed a record high in August. UK Manufacturing PMI sits at 60.3 in August, a 5-month low.

The Consumer Prices Index rose by 3.2% in the 12 months to August 2021, up from 2.0% in July: the increase of 1.2 percentage points is the largest ever recorded increase in the CPI National Statistic 12-month inflation rate series, which began in January 1997; this is likely to be a temporary change, ONS reported last week.

Based on these facts, we expect MPC to vote unanimously to leave the rate unchanged at 0.1 and keep 8-1 to hold the asset purchase program at 875B pounds.

We expect the Bank of England policy meeting to leave markets quite comfortable with their current policy-rate pricing, which should ultimately see the impact on sterling being quite limited. If anything, markets may have priced a somewhat more hawkish tone for this week, and we may see GBP coming under some mild pressure, but we think any move will be short-lived, ING reported.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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