GBPUSD has rallied from the lows of a recent trading range but could reverse on the coming economic data.
GBPUSD – Daily Chart
The GBPUSD exchange rate pushed above 1.22 yesterday but has since reversed those gains as traders remain anxious about the Federal Reserve.
Despite the recent banking crisis, traders are still trying to determine the Federal Reserve’s action. The Fed will likely pause on rate hikes as it will put its 2% inflation target on the back burner with the risk of a more significant banking crisis. By raising rates again, the bank could incite further panic and uncertainty, leading to further selling of the vulnerable banks.
The Fed Chair Jerome Powell had told congress to expect higher rates, and traders had anticipated a 50bps rate hike. That was before the collapse of Silicon Valley Bank, which was driven mainly by the Fed’s actions.
SVB took a $1.8bn loss on its bond holdings and attempted to raise capital in the financial markets. When that failed, a run on its deposits began and enveloped the entire banking sector.
Powell has also come in for criticism, with Senator Elizabeth Warren saying that the Chair had “failed” on regulation and monetary policy. She also said he should not be in the current role.
Tomorrow will also see the latest inflation report from the United Kingdom economy, with an expected slip to 9.9%. That is still stubbornly high and the worst of the developed economies.
The Bank of England also meets this Thursday. They are widely expected to ignore the crisis with Credit Suisse and hike rates again. The central bank has little choice, with the inflation still near double digits.
Growing Concern & Banking Problems Surround The Fed
“New problems could yet emerge, with Credit Suisse highlighting the risk of contagion as fears spread well beyond the issue of unrealised losses at smaller banks,” said Andrew Hunter, an economist at Capital Economics.
Deutsche Bank and Nomura expect the BoE to raise rates by 25bps, an eleventh consecutive hike.
“A strong labour market, potentially sticky core inflation in the near term, a loosening budget last week, some stronger data outcomes since the last MPC meeting, and the fact that 4.25% doesn’t look like a particularly high end-point for rates relative to past cycles, all point to the need for a hike,” Nomura said.
“With financial stability risks becoming more apparent, it’s likely that the MPC treads cautiously on how much further it raises Bank Rate,” Deutsche added.
Traders have a low and high target with the trading range and should play it according to the rate hike reaction.
