• GBP/USD buy zone of 1.24 to 1.16 could be deceiving
  • Monetary policy, recession, and inflation present downside risks

I’m tempted to look at a higher time frame chart of GBP/USD and say it looks cheap. Whether the pound has fallen due to the flash crash or COVID-19 concerns, buyers have always been quick to snap up GBP/USD anywhere between 1.24 and 1.16 levels. That might ultimately hold out to be true, but I’m not completely convinced that history will repeat itself.

UK inflation is my top concern for the British pound. Economic theory suggests that relatively higher inflation should put downward pressure on the nominal exchange rate, all other considerations being equal. Wednesday’s May UK CPI release is expected to show UK CPI rose to 9.1% y/y, which would put UK inflation ahead of that for the US for a second consecutive month.


Furthermore, the Bank of England looks for the time being less inclined than the Fed to do something about inflation. The Fed raised interest rates by 75 bps in June to take the Fed funds rate to a range of 1.5% to 1.75% and signalled its willingness to do what it takes to control inflation.

In contrast, the Bank of England raised by 25 bps in June to take bank rate to 1.25% as the majority of the MPC resisted a 50 bps hike. Even if the Bank of England does seek to tightening monetary policy more aggressively going forward, it may face more of an uphill climb in terms of convincing markets that it is serious about inflation.

GBP/USD buyers also need to contend with heightened fears of recession on both sides of the Atlantic, which would most likely disfavour the British pound more than the US dollar, as global investors seek the safety of US assets versus the rest of the world. In summary, GBP/USD looks cheap but for good reason.     

All communication, messages, media and links distributed on this channel has been prepared by VARIANSE solely for information purposes without regard to any particular user’s investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but VARIANSE does not represent that it is accurate or complete. VARIANSE does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sales of any financial instrument. The information contained herein has no regard to the specific investment objects, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment decision. It is important to note that past performance is not indicative of future results. VARIANSE is a trading name of VDX Derivatives, authorised and regulated by the Financial Services Commission (FSC) of Mauritius. FSC license number C118023323. VARIANSE is also a trading name of VDX Limited and is authorised and regulated by the Financial Conduct Authority (FCA) in the United Kingdom. FCA register number 802012. This publication is not directed to residents of the United States and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD stays below 1.0700 as focus shifts to US data

EUR/USD stays below 1.0700 as focus shifts to US data

EUR/USD stays on the back foot and trades in negative territory below 1.0700 as investors await US PMI data. Earlier in the day, the data from Germany and the Eurozone showed that the private sector lost growth momentum in early June, making it hard for the Euro to hold its ground.

EUR/USD News

GBP/USD struggles near 1.2650 after UK PMI data

GBP/USD struggles near 1.2650 after UK PMI data

GBP/USD is struggling to stage a rebound from the monthly low it set below 1.2650 on Friday. The mixed PMI data from the UK limits Pound Sterling's upside, despite the stronger-than-expected Retail Sales data for May. US PMI data are coming up next.

GBP/USD News

Gold extends rebound to fresh two-week-high above $2,360

Gold extends rebound to fresh two-week-high above $2,360

Gold continues to stretch higher and trades at its highest level in two weeks above $2,360 after posting strong gains on Thursday. Falling US Treasury bond yields and the cautious market mood support XAU/USD ahead of US PMI data.

Gold News

Bitcoin retraces to crucial support

Bitcoin retraces to crucial support

Bitcoin price encounters resistance at weekly highs before retracing to seek support at a crucial level, while Ethereum and Ripple align closely with Bitcoin's movements, gearing up to surpass resistance barriers and embark on upward rallies.

Read more

US S&P Global PMIs Preview: Economic expansion set to extend into June

US S&P Global PMIs Preview: Economic expansion set to extend into June

The S&P Global Manufacturing PMI is forecast to edge lower to 51.0 from 51.3 in May, and the Services PMI is expected to retreat to 53.7 from 54.8. A reading above 50.0 presents an expansion in the sector’s business activity.

Read more

Majors

Cryptocurrencies

Signatures