• 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.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD recovers above 1.0450 as USD slips ahead of US inflation

EUR/USD recovers above 1.0450 as USD slips ahead of US inflation

EUR/USD is trading above 1.0450, displaying a modest rebound on a minor pullback in the US dollar. The US Treasury yields rebound amid cautious optimism, ahead of PCE inflation. The US Core PCE Price Index is seen easing to 4.7% YoY in May. 

EUR/USD News

GBP/USD advances towards 1.2150 amid USD retreat, US data eyed

GBP/USD advances towards 1.2150 amid USD retreat, US data eyed

GBP/USD is advancing towards 1.2150 amid a broad US dollar retreat, despite a mixed market mood. BOE's Bailey said the UK economy is facing a very large real income shock. UK data and US PCE inflation awaited. 

GBP/USD News

Gold seems vulnerable near two-week low, eyes US PCE inflation data

Gold seems vulnerable near two-week low, eyes US PCE inflation data

Gold traded with a mild negative bias for the fourth successive day on Thursday and languished near a two-week low touched the previous day. The XAUUSD was last seen hovering around the $1,816 region and was pressured by the prospects for more aggressive rate hikes by the Fed.

Gold News

Breaking: Bitcoin price drops below $19,000

Breaking: Bitcoin price drops below $19,000

Bitcoin price has breached a critical area of support over the past few hours, dipping below $19,000. Transaction history shows that a large number of addresses acquired BTC above $20,000. 

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!

BECOME PREMIUM

Majors

Cryptocurrencies

Signatures