UK public sector bonds remain high; Fed officials will speak later in the day; the symmetrical triangle pattern on the GBP/USD daily chart currently has the potential to break through.
GBP/USD Fundamental Background
Spending by the UK public sector (see economic calendar below) outstripped revenues in October, pushing UK borrowing to the fourth highest level on record in October. The natural economic response behind rising debt levels is to raise interest rates to compensate investors for the risk of default. So, given the traditional positive correlation between interest rates and the degree of currency strength, the immediate reaction for GBP is to move slightly higher. That said, additional aggressive rate hikes are not sustainable for the UK economy given recession fears and already elevated interest rates.
The speeches of Fed officials in the early hours of Wednesday morning will be the focus of the market, the most aggressive of which may be Bullard. That’s when Bullard will likely maintain the hawkish rhetoric he’s been making for the past week or so. Given ongoing concerns about UK public finances, this could prompt GBP/USD to weaken further.
GBP/USD Economic Calendar
Chart source: DailyFX Economic Calendar
GBP/USD daily chart
Chart source: IG, drawn by Warren Venketas
GBP/USD daily has been trading inside a symmetrical triangle formation and is now looking to break out in the short term. Fundamentals show that if the exchange rate falls below the triangle support, it is expected to fall to a shock low of 1.1738 or even lower in the future. However, the underlying symmetrical triangle pattern may also be invalidated if the price breaks and closes above the overhead resistance.
Key Resistance Levels:
Key support levels:
IG Client Sentiment: Bearish
IGCS client sentiment data shows that retail traders are currently net short GBP/USD; 54% of traders are net long at the time of writing. Retail sentiment is generally considered to be a contrarian indicator, but given recent changes in long and short positioning, we believe GBP/USD is biased towards the downside in the short term. (Written by Warren Venketas and translated by Ashley)
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