By GBP/USD Technical Analysis: Volatility Path Continues – 25 October 2022
While the market has welcomed recent developments in the UK PM selection process, it has done little on its own to improve the UK’s economic outlook, which will be in focus once again with the release of the S&P Global PMI surveys for October.
The pound rose broadly from Monday’s opening, including against the dollar. This happened after parts of the ruling Conservative Party succeeded in deterring former Prime Minister Boris Johnson from participating in the final selection process for the post of prime minister. That leaves behind him as contenders in the race two favorites each in the financial markets if and when he sided with former Prime Minister Johnson. The outcome of the race is due to become known on Monday and no later than Friday.
“We continue to expect a comfortable rally in the GBP/USD once the new Tory leader is chosen, but we had to lower our expectations for the extent of that rally given the strength of the US dollar and general conditions surrounding risk appetite, and if the 1.15-1.17 range achieved in cable in the very near term, we will currently look at this range as a suitable short entry point. The year-end target range for the cable is 1.08-1.12,” commented an analyst.
While the market has welcomed recent developments in the UK PM selection process, it has done little on its own to improve the UK’s economic outlook, which will be in focus once again with the release of the S&P Global PMI surveys for October. So says Samuel Tombs. UK Chief Economist at Pantheon Macroeconomics.
“Purchasing managers’ confidence has likely been greatly undermined by the sharp deterioration in funding conditions for their businesses and uncertainty over the political and financial outlook. The PMI also has a tendency to exaggerate the impact of shock events on economic activity,” he said.
PMI surveys are expected to point to a deepening recession in Britain’s manufacturing and services sectors. However, they will be the latest in a growing list of signs the economy is slowing faster than expected by the Bank of England (BoE) and other forecasters. The outlook for GBP/USD is also likely to depend on whether the weekend setback for the US dollar extends into the new week and what the market makes of the upcoming US economic data regarding the Fed’s policy outlook.
One of the risks to the GBP/USD price this week is that GDP data on Wednesday shows that the US economy is emerging from a technical recession just as the UK is believed to be entering one into a divergence in economies that could have room to undermine the recovery from the middle of the week. However, Friday’s release of the core PCE price index, the Fed’s preferred inflation measure, for September is also a potential headwind for the pound-dollar rate given expectations that this measure of inflation will rise from 4.9% annually to 5.2. %.
This is likely more than enough to ensure that the Fed stays on the rate path set in September. This has helped lift the dollar against many currencies since the bank has put itself on track to raise the benchmark interest rate to 4.5% by the end of the year and 4.75% early next year.
I still expect the GBP/USD price to continue to fluctuate until the new British Prime Minister’s vision becomes clear. The currency pair will continue to react to reports about that. I still prefer to sell sterling dollars from every rising level, because the factors of the stronger US dollar gains.
Currently, the closest resistance levels for the bulls’ attempts to control are 1.1385, 1.1460 and 1.1600, respectively. On the other hand, according to the performance on the daily chart below, the break of the 1.1185 support ends the bulls’ aspirations to control the market.
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