The rate hike cycle is more likely to happen than not, but it is still unlikely to happen in 2021. The moves in the pound today are pricing in the higher probabilities but this can all get unwound very quickly if the Bank of England come out very dovish due to the rising uncertainties around the Omicron variant.
Forex Analysis
Today, the Bank of England (BoE) concludes its meeting with a Monetary Policy Summary, a vote on the Purchase Facility, and a vote on the Bank Rate.
As a result of the MPC's decision to depart from the market consensus in November, markets have been pricing in an anticipated 15 basis point interest rate hike. Post-November's disappointment the Hawkish outlook has been adversely affected by the Omicron variant, and the UK government's move to "Plan B", which has already begun to affect the economy.
Today's economic calendar shows the rate is expected to remain unchanged at 0.1% but the pound has been rising, with the move accelerating with a weakening US dollar following the FOMC last night. Earlier this week, markets had placed a 42% chance of a 15bps hike. However, this number moved following the November CPI report where it had risen to 52.5%. Inflation is now persistent rather than transitory and rate hikes are coming, we just may have to wait until March 2022. Once again, most analysts and the market will have diverging views heading into this meeting, which is a recipe for re-pricing on another decision that maintains the status quo.
In the lead up to the decision the pound is relatively stronger against the safe havens but weaker against the commodity pairs. Which again reads as probable rate hikes and an appreciation of the pound in days to come.
The ActivTrader sentiment indicator also shows that most retail traders on the platform are also bullish the pound. Which to mean is a red flag and I expect these traders to be squeezed out of their trade first before the pound does really appreciate.
Whether you look at the Ichimoku indicator or the major moving averages, the current price action is showing momentum to the downside on the higher time frames. The current resistance levels are around the 1.3200 to 1.3300 price zones and the daily 20-period EMA.
Known significant resistance is at the 1.3350 level so if we were to see price above there following today’s decisions the chance of a test up to the 50-period moving average would be the next logical target. Beyond that to the 200-period moving average and there is some significant resistance every 50-100 pips.
The hourly chart is looking bullish currently as it is showing prices above the 20,50 and 200-period EMAs, it is also making higher highs and higher lows which is a bull move. The stop run from last night’s FOMC meeting took out the weak holders below 1.3190 but I would imagine that there are now a lot of stops building below that large tail from the FOMC decision candle. 1.3200 will be key and a close below would signal to me the further downside risk to take the liquidity built last night above 1.3150-1.3160. If the higher time frames can build a more bullish structure with higher swing highs and higher swing lows, I will look for a possible breakout, retest and continuation trade but I don’t expect to be long for the rest of the year.
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