The pound updated the 9-month price low against the dollar today, collapsing by 200 points in just a few hours. The last time the GBP/USD pair was in the area of 1.3530-1.3550 in January of this year – at that time, the pound was within the framework of a protracted and large-scale upward trend after the autumn-winter recession in the range of 1.25-1.27. Today we are observing a mirror situation. If we look at the weekly chart of GBP/USD, we will see that the pair has been steadily declining for the fourth consecutive week. The price was at the borders of the 39th figure at the beginning of September, whereas now the bears have settled within the 35th price level.
Today's fall of the pair is due not so much to the weakening of the pound as to the strengthening of the greenback. The US dollar index jumped up in the afternoon, updating the 11-month high (93.76). The main dollar pairs behaved accordingly. In one way or another, the dollar strengthened its positions in all pairs, recalling itself after yesterday's flat. The greenback rose most strongly in a pair with the yen, pound and franc. Dollar bulls "swayed" for a long time after the announcement of the results of the September meeting of the Federal Reserve, but in the end decided to seize the initiative. This was facilitated by many fundamental factors that are largely interrelated.
First of all, it is necessary to recall that the results of the last Fed meeting really turned out to be in favor of the greenback. The US central bank, firstly, announced the curtailment of QE (this process will begin in November), and secondly, it tightened its position on raising the interest rate. According to the Fed's point forecast, half of the Committee members admit an increase in the rate next year. According to another scenario, the Fed will raise the rate three times in 2023. And if the situation with QE was expected and generally predictable (the only question was when exactly the central bank would start the process of winding down – in November or December), then the prospects for a rate hike in 2022 really surprised. Experts correlate the current situation with previous taping cycles, warning of a possible dollar rally in the second half of this autumn.
Other factors also helped the dollar. Among them, we can single out the growth of the commodity market and a sharp rise in the yield of 10-year US Treasury bonds. Oil is actively getting more expensive, and this fact has significantly increased inflation expectations. Two months ago, a barrel of Brent crude oil was trading around $65-67, while today a three-year high was updated – the price came close to the $80 mark. The increasing energy shortage and the abrupt rise in gas prices have affected the dynamics of crude oil.
Let me remind you that after a months-long rally, US inflation showed a slowdown in growth – in July and (especially) August, the consumer price index came out either at the level of forecasts or in the red zone. This fact allowed the Fed not to rush into action, especially against the background of contradictory August Nonfarm. The current situation on the commodity market suggests that inflation in the United States may resume its growth, providing additional support to the US currency.
On the side of the dollar and anti-risk sentiment, which intensified today after the speech of US Treasury Secretary Janet Yellen in Congress. The "ghost of the shutdown" is to blame for everything. The former head of the Fed said that the problem of the debt ceiling should be solved "as soon as possible" and raise its limit. The deadline is October 18. According to Yellen, if lawmakers do not reach a consensus on this issue by this date, the country will be on the verge of a "large-scale economic catastrophe." Such categorical statements by the minister reinforced the anti-risk sentiment in the foreign exchange market. Let me remind you that in 2019, during the Trump administration, a record-breaking shutdown was recorded in the US, which was provoked by a political crisis.
Fed Chairman Jerome Powell also spoke in Congress today. First of all, he said that the Fed has "almost reached" the bar for the beginning of the curtailment of QE, but at the same time a similar bar for raising rates is located "at a higher level." It is noteworthy that against the background of the energy crisis, Powell became concerned about inflationary trends. He said that at the moment inflation is a "stronger concern." He attributed the growth of inflation indicators to the continuing disruptions in the supply chain.
All of the above fundamental factors are pushing up the US dollar index. The pound, in turn, cannot withstand the onslaught of dollar bulls. And although the Bank of England demonstrated a hawkish attitude at its last meeting, many experts doubt that the British central bank will decide to tighten the parameters of monetary policy in the near future. The fact is that Britain has faced a rather sharp reduction in fiscal support – many programs have either already completed their operation, or are about to be completed. According to some currency strategists, this fact is likely to have a significant impact on the growth of the British economy.
Thus, in the GBP/USD pair, short positions are still a priority, primarily due to the general strengthening of the dollar. The strongest support is located at 1.3500, which is the lower line of the Bollinger Bands indicator on the weekly chart. On the one hand, after such a powerful impulse decline, as a rule, a corrective pullback follows, so at the moment it is quite risky to enter short positions. On the other hand, any corrective surges can now be viewed as a reason to open short positions, as the dollar will gain momentum throughout the market in the medium term.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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