GBP/USD latest: US CPI, UK spring budget, banking shares rout
14:07, 15 March 2023
US CPI and SVB collapse see “no hike” being priced in for March FOMC meeting
US consumer prices fell to 6% in February as markets were anticipating, the smallest annual gain since September 2021, with the monthly rise falling to 0.4% from 0.5%. But core inflation continues to be a cause of concern as prices excluding food and energy rose 0.5% after rising 0.4% in January, highlighting the shift from goods inflation to services inflation.
US stock indices jumped higher after the data after a few turbulent days from the fallout of the Silicon Valley Bank (SVB) collapse, which has seen the most volatility in us bonds in the last two decades. The drop in CPI has fallen in line with hopes that the US economy is not overheating, something that had become a big concern after the strong economic data in January. Friday’s jobs data also relieved some of the anticipation for next week’s FOMC meeting as the unemployment rate ticked up slightly after falling to the lowest level since 1969 in January
The collapse of SVB has also served to reprice expectations regarding the FOMC meeting as the chance of a 50bps, which had become a strong probability after Powell’s hawkish comments last week, has been completely priced out, with an 80% chance of 25bps vs 20% chance of no hike at all. This is because many investors believe the Fed needed something to “break” in order to reassess their monetary policy, and the turmoil in the financial system over the past few days may be just that. In fact, many times we’ve heard Powell reiterate that the rate hikes delivered last year weren’t evident enough to have easy financial conditions, given the extremely tight labour market and stubborn inflation, but the impact than an inverted yield curve is having on smaller banks - which are having to borrow at higher rates than what they lend out in the longer-term - is a clear sign of struggle, and may just be the “breaking point” the Fed has been waiting for, hence the repricing in rate expectations and the significant drop in bond yields.
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GBP/USD runs out of steam
Following a three-day rally, GBP/USD is facing a technical correction after facing resistance at 1.2200 for the second day in a row on Tuesday. The pair is edging lower by 0.5% on Wednesday morning as traders digest the US consumer inflation data released on Tuesday, allowing the US dollar to regain some of its upside.
The recent strength in the Pound, not only against the dollar but also against other currencies like the Euro and the Yen, has likely had an impact from the recent data showing a resilient UK economy. But as we know, this can be a double-edged sword in times of persistently high inflation like the present, given the Bank of England’s (BOE) reluctance to hike rates aggressively over the past few months, which has been widening the rate differential with the US. The strength of the Pound will be put to the test next week as the BOE delivers its March monetary policy update, where markets are pricing in a 54% chance of a 25bps hike vs 46% of no hike at all.
No doubt the SVB chaos has had a large impact on the repricing of rate expectations but it surely won’t have been as hard to come to terms with compared to the Fed, given Governor Bailey’s comments where he was “unclear” as to whether further rate hikes would be necessary, a start contrast to Jerome Powell and the ECB’s Lagarde who remain as hawkish as ever.
So far the pullback in GBP/USD has found some support along the 100-day SMA (1.2037) which has prompted a reversal within the daily bearish trend. The RSI has tilted downwards once again after harrowingly crossing the 50 mid-line on Monday, suggesting that the bullish rally which started last week hadn’t quite run its course to the overbought level.
One thing to point out is the breakaway from the descending wedge pattern which had kept GBP/USD within a tight range with a bearish tilt throughout most of February. The key support area (1.1912 - 1.1962) will likely continue to offer sellers some resistance, as will the 200-day SMA (1.1892).
UK spring budget shows improving economic forecasts
In his Spring Budget, UK chancellor Jeremy Hunt has unveiled a series of measures to draw people back into work which includes more childcare and support for people with disabilities. He has also announced an increase in defence spending and increased corporation tax from 19% to 25% as expected. The Office for Budget Responsibility (OBR) has forecasted that the UK economy will not enter into a technical recession this year, with inflation falling to 2.9% by the end of the year, compared to the average of 7.4% predicted in the autumn statement. Chancellor Hunt also expects the unemployment rate to rise by less than 1% from 3.7% to 4.4%.