There are so many unknowns around the COVID-19 variants and vaccines that governments and central banks are trying their best to remain cautious, optimistic, accommodative, and fiscally responsible, all at the same time. The data could be great if there weren’t the persistent ‘what if’s’ associated with the virus. It may take political will to move the needle and to keep the electorate happy, whatever the virus decides to do next.
GBPUSD Forex Analysis
The Bank of England (BoE) is less likely to raise rates in December and may delay them until February due to the unknowns surrounding the spread of the Delta and Omicron variants in the UK and around the globe. The timing of the gap between the first Fed and BoE rate hike could be shorter than expected if the Fed accelerates its QE tapering and the BoE does not increase rates this month, so the risks to cable remain to the downside in the near-term.
In a speech on Friday, BoE policymaker Michael Saunders signalled a more cautious approach. Deputy Governor Ben Broadbent of the Bank of England stated today that the aggregate rate of inflation is likely to rise further over the next few months and may even eclipse 5%, particularly after the Ofgem cap on retail energy prices is re-adjusted in April 2022. Given the low level of evidence about the effects of Omicron on public health and thus the economy, Saunders argued that it might be beneficial to wait for further evidence on its possible effects.
Based on these comments, the BoE appears less certain of the need for an immediate rate hike at the 16th December meeting, but one will be needed in 2022 to cool the markets. If the BoE dithers too long, rate hikes will likely need to be more aggressive and as a result, the markets will likely be even more rattled.
The GBPUSD is likely to drop further on a no-rate hike in December and a more hawkish Fed. The rise up to the highs in 2021 was messy, and the fall from these highs could get messier. 1.2900 looks like a logical target as it essentially was the lift-off point for the grind higher after the price broke out of the June 2020-August 2020 trading range.
The Stochastic oscillator is showing no signs of divergence with price currently, so I am not even expecting a little bounce.
On Friday we receive the latest US CPI data, and the Bank of America has illustrated how President Biden's approval ratings have declined as CPI has risen. Higher prices are not all the factors that make up a President's approval rating, but it will be politically damaging if something is not done soon to reverse both curves' direction of travel. If CPI comes out hot this week I would expect a very bullish reaction in the US dollar, which would weigh on the GBPUSD.
Retail traders on the ActivTrader platform are very bearish on the GBPUSD, so there is a chance that they get stopped out before a big move to the downside. So that is something to keep an eye on. If they switch their viewpoint to being more bullish for some reason this week, the Fibonacci retracement levels will be a useful guide for adjusting targets to the downside.