The British Pound might have received a shot in the arm following the September Bank of England rate meeting. Yet, the chart says that there is still a high risk of a lower GBPUSD in the weeks ahead.
UK inflation could reach 4%, but what about the 1.6 Million furloughed?
On September 24, the BoE said that inflation could reach 4% by winter 2021 and remain around this level until at least Q2 2022. The news prompted speculators to anticipate two rate hikes by Q3 2022. However, I suspect the market might be getting ahead of itself. Because, whilst inflation of 4% is two times the mandated inflation target of 2 per cent, we still don’t know how the UK labour market will react to the end of the furlough schemes by September 30. As the furlough scheme ends, UK employers need to determine whether to keep their furloughed employees or make them redundant. By the end of July, 1.6 million people were on the scheme.
New hybrid working models
Also, with no clear instructions from the UK government about returning to the office, it is unlikely that we will see life returning to the old normal, with five working days a week in the office. Instead, the typical UK office worker is now set on working up to three days a week
from the office and two days from home.
There are several reasons for this, but expensive, busy, and long commuting are three key drivers, whilst most office workers can solve most of their issues without going to the office.
The change in attitudes by workers will make it unlikely that the support and entertainment businesses around office workers will quickly bounce back.
A high risk that the labour market underperforms
Instead, there is a high risk that the labour market underperforms, and the market expectations of BOE rate hikes should see increased volatility, causing the British Pound to soften. Also, the Bank of England has still not committed itself to end quantitative easing, whilst the Fed has.
GBPUSD the technical outlook remains bearish
The GBPUSD has formed a well-shaped descending triangle since June 2021. Three near-perfect lows have been carved out at 1.3597, and a break to this level will trigger the pattern and send the price to the pattern target of 1.3232. The price could also break the other side of the pattern, but for this to happen, the price would need to trade above the downward sloping trend line seen in the chart below and the September high of 1.3911. Yet with EURUSD also looking weak, I am leaning towards a bearish breakdown.
High-risk investment warning: Trading Foreign Exchange (Forex) and Contracts for Differences (CFDs) is highly speculative, carries a high level of risk and may not be suitable for all investors. You may sustain a loss of some or all of your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin. Any opinions, news, research, analysis, prices or other information contained in this presentation is provided as general market commentary and does not constitute investment advice.