What to watch: GBPUSD rollercoaster set to continue

Following an explosive couple of weeks where the Cable has continually alternated between bullish and bearish swings, the GBPUSD has already commenced Monday’s European session by slipping back below 1.61. The 30 pip downside move was likely linked to comments from Bank of England (BoE) Chief Economist Andrew Haldane on Friday that UK interest rates should remain low while issues such as weaker global economic growth, political risks and low wage growth continue to attract headlines. An early morning report from forecasting group EY Item Club that the UK economy will only grow by 2.4% in 2015 – substantially below the 3.1% expected this year has probably also encouraged investor attraction towards the GBP to weaken slightly.

Before we view such headlines as indications UK rate rises will be delayed and as such, the Cable will continue releasing its past year’s gains – attention must be directed towards the upcoming high risk economic releases from both the United States and United Kingdom. Investors should be clear that as we saw from last week’s widespread USD sell-off, the Cable can reverse to the upside very suddenly. The Federal Reserve’s usually hawkish representative, James Bullard, surprised the majority when he unexpectedly suggested that the Fed should consider delaying the conclusion of QE in October, and continue purchasing asset-based securities to prevent a decline in expected inflation levels.

The previous FOMC Minutes release expressed that there was anxiety among the Fed that the recently higher valued USD could have a detrimental impact on US CPI but due to the unexpected nature of Bullard’s comments, this Wednesday’s US inflation data is now going to be monitored from investors around the globe.

Annualised inflation is expected to rise by 2.1% but as we saw from last week’s unanticipated UK, China and possibly even tonight’s Australian release, lower than expected inflation levels are emerging as a global theme. Whether the lower inflation levels are attributed to a decline in prices, or a lack of investor confidence in the global economy following consistent economic downgrades is questionable, but the immediate reaction to the possibility of US CPI also falling below expectations would result in heightened anxiety that not only will the Federal Reserve continue QE, but effectively rule out a US interest rate hike and weaken confidence in the US economic recovery as a whole. This would result in aggressive USD movement, where investors close their positions and take profit. As such, upside moves in pairs like the Cable would follow.

Before the US inflation data, we also have the latest BoE Minutes released on Wednesday morning. It is well-known that two members of the Monetary Policy Committee (MPC) have voted for a rate increase for the past two successive months, and GBP bulls will be hoping a third member has joined them in October. However, the downside risk for the Cable is that the two dissenting voters within the MPC might look at some of the recent economic data and switch their votes. Within the past month, there has been a global economic downgrade from the IMF and an unforeseen UK Manufacturing PMI falling below expectations, due to weakening demand from Europe. Chancellor George Osborne has even repeatedly expressed that the EU economic problems pose the largest threat to the UK recovery.

Furthermore, the two members of the MPC in question might even look at UK inflation slipping to 1.2%, far below the BoE’s 2% target alongside average wage growth only increasing by 0.7% last week as a reason to keep rates unchanged. In the event this happens and due to the BoE Minutes being released before the US CPI, Cable support can be found around 1.6062, 1.6008.