Pound-to-Dollar Rate Slides but Charts Point to Gains and Inflation Pressures are Taunting the BoE

© Pound Sterling Live, Bank of England

- GBP slides but fundamental, technical outlooks bullish

- Brexit drives GBP lower, but BoE could soon pick it back up

- Hantec, XM.com both eye bullish technical signals on GBP charts

The Pound ceded ground to the Dollar Wednesday but technical analysts say the charts are pointing to gains ahead just as inflation pressures are believed to be building in the economy again, leading economists to warn that Bank of England (BoE) interest rate hikes are on the way. 

Inflation rose to 1.9% in February, according to Office for National Statistics (ONS) data released Wednesday, when markets had looked for it to hold steady at 1.8%. The consumer price index is now, and once again, threatening the BoE's 2% target. 

Core inflaiton, which economists say is the better measure of price pressures, dipped from 1.9% to 1.8% that month. However, ONS data released Tuesday also showed wages continuing to grow at a decade-long high. 

Real pay growth is rising again too, given that inflation is falling. The Bank of England has long feared household pay increases that could push the consumer price index above its 2% target. Interest rate hikes are one way to combat rising inflation. 

"With inflation on the up and signs of increasing inflationary pressures in the labour market, we doubt the Monetary Policy Committee (MPC) will sit on its hands for long after tomorrow’s meeting. If there is a Brexit deal or a short delay, we think that the MPC will get another rate hike or two under its belt later this year," says Ruth Gregory, an economist at Capital Economics.

The Bank of England has raised its interest rate by 25 basis points on two occasions since the referendum in 2016, taking the Bank Rate up to 0.75%, it highest level since before the global financial crisis.

BoE officials have said repeatedly in recent months that elevated inflation and a robust outlook for consumer price pressures mean it'll need to keep raising rates in the coming quarters.

However, for now, they're being sidelined by the Brexit pandemonium in parliament and Sterling has been largely unresponsive to changes in economic data as a result. 

The Pound-to-Dollar rate was quoted -0.77% lower at 1.3168 Wednesday but has risen 3.2% this year. 

Above: Pound-to-Dollar rate at daily intervals.

"The market could maintain upside momentum as the RSI remains in a positive area and the MACD has jumped above its trigger line in the bullish zone," Melina Deltas, a technical analyst at XM.com.

The Pound-to-Dollar rate is likely to continue its ‘bullish tendency’ according to a technical studies of the charts, despite growing Brexit risks threatening to push it lower, according to Deltas.

Technical analysis is the study of price charts. Some argue it is a more ‘objective’ method of making trading decisions than using fundamentals but that is open to debate. 

Nevertheless, it is widely used by currency traders. And GBP/USD momentum remains strong, with the relative-strength-index (RSI) and moving-average-convergence-divergence (MACD) momentum indicators providing particularly bullish signals, according to Deltas. 

Above: XM.com analysis of GBP/USD

A break above the 1.3350-80 highs would provide confirmation of an extension up to 1.3475, although Deltas says the longer-term picture "appears neutral.”

The short-term bullish call is interesting as it comes at a critical time the pair’s fundamentals. The Pound has lost ground over recent days due to continued uncertainty over the outcome of Brexit. The Dollar, meanwhile, has stabilized after a long bout of weakness ahead of a meeting of its central bank, the Federal Reserve, this evening.

Prime Minister Theresa May’s government has requested a short 3-month extension of Article 50 window in order to convince MPs to back her deal.But there had been rumours of a longer delay, which would have been more positive for Sterling, hence losses on Wednesday.

Of course, the delay still needs to be agreed by the EU and already the latest developments have taken the wind out of Sterling’s sails, since markets dislike anything that looks even remotely like Brexit.

Some analysts are suggesting the Dollar may also be at risk of weakness though, when the Fed speaks tonight. Richard Perry, an analyst at broker Hantec Markets, says the Fed could adopt a more optimistic stance on the economy which would be supportive of the currency. He says the market has gotten too gloomy about the outlook for America, ignoring recent economic data that hasn't been as bad as some claim.

“But has the market gone too far? CME Group FedWatch is actually pricing a 25% probability of a rate cut this year. The dollar has slipped back in the past couple of weeks, but Fed chair Powell remains confident of the US economy. Whilst only two FOMC members are seen dovish in calling for no hikes this year, this group is unlikely to swell so much that there is a realistic prospect of a cut this year. The dollar could get some respite if this is the case as the market tends to swing too far before having to wake up to the reality of a US economy which is still holding up relatively well,” says Perry.

From a technical analysis perspective Perry is neutral, with a marginal bullish bias. He emphasises how ‘flat’ the market has been, moving in an ever narrowing true range, which amounted to only 72  basis points yesterday. He notes substantial support underpinning the pair at 50 point intervals.

“The Fed tonight could be interesting, but in the meantime, there are still broadly 50 pip increments of support at $1.3200, $1.3150, $1.3100 and $1.3050,” Perry adds. “There is still a positive bias to Cable and corrections are a chance to buy for a likely Brexit related rally in due course."

Above: Hantec Markets analysis of GBP/USD.

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