Pound Sterling (GBP) Analysis
- Monetary policy committee set to testify in parliament
- Cable (GBP/USD) appears vulnerable to bearish threat
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Monetary Policy Committee Set to Testify in Parliament
This morning members of the Monetary Policy Committee (MPC) are set to provide testimony to parliament’s treasury committee around their views of the economy and inflation that led to their decision to hold interest rates in January.
There was certainly a diverse range of opinions upon the release of the votes, revealing a three-way vote split with two members opting to hike interest rates, six members opting to hold, and the dove within their ranks (Swati Dhingra) favouring a 25 basis point cut.
As a result, the hearing today is likely to shed further insight into the thinking of those on the committee. The UK economy fell into recession in Q4 last year which will likely result in tough questions being asked of the committee as to why they persist with keeping interest rates at a level that constrains economic growth.
In the January meeting, the Bank of England’s forecasts suggested that inflation will drop drastically towards its 2% target by the middle of this year, accompanied by more modest declines in wage growth and inflation within the services sector. The tide is changing and major central banks are nearing the first rate cut of this cycle, however bankers continue to stress that a greater degree of conviction is required before making that huge step.
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Cable Appears Vulnerable to Bearish Threat
Cable appears vulnerable to further downside momentum ever since attempting to break lower earlier this month. Continued resilience in the US labor market provided the initial catalyst for the downside move which ultimately failed to gain traction below the 200 SMA.
Since then price action has oscillated around channel support and the key 200 day simple moving average. Bullish drivers for the pound are scarce, particularly at a time when they economy has finally faltered and markets have begun to price in the need for more support from the Bank of England which ultimately takes the form of rate cuts.
GBP/USD Daily Chart
Source: TradingView, prepared by Richard Snow
The weekly chart helps to get a feel for the waning bullish momentum and zone of resistance at the 61.8% Fibonacci retracement of the major 2021-2022 decline. A series of long upper wicks on the weekly candlesticks help to reveal bullish reluctance, suggesting the path of least resistance may appear to the downside. This week we see a number of FOMC members making appearances alongside the release of the FOMC minutes from the January meeting, which is likely to bring intra-day volatility to US-related pairs.
Weekly GBP/USD Chart
Source: TradingView, prepared by Richard Snow
— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
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Title: Is GBP/USD on the Brink of Collapse? How to Prepare for a Potential Breakdown
Introduction:
There has been a lot of speculation and discussion surrounding the possible collapse of the GBP/USD exchange rate. With Brexit negotiations ongoing and global economic uncertainties, many are questioning the stability of this widely traded currency pair. So, is the GBP/USD on the brink of collapse? In this article, we will explore the factors that could potentially lead to a breakdown and provide practical tips on how to prepare for such a scenario.
Understanding GBP/USD:
Before diving into the potential collapse, let’s first understand what the GBP/USD exchange rate represents. GBP/USD is the abbreviation for the British Pound and the US Dollar currency pair. It is one of the most liquid and widely traded currency pairs in the foreign exchange market, with a daily trading volume of over $1.5 trillion. The exchange rate between the two currencies reflects the economic strength and stability of both the UK and the US.
Factors Leading to a Potential Collapse:
There are several factors that could contribute to the potential breakdown of the GBP/USD exchange rate. Here are some of the major ones to consider:
1. Brexit Uncertainties: The uncertainty surrounding Brexit has been a significant factor in the volatility of the GBP/USD exchange rate. With the UK’s impending exit from the European Union and the ongoing negotiations, it has raised concerns about the future of the British economy and its currency.
2. Economic Instability: The global economic landscape is plagued with uncertainties, including the ongoing US-China trade tensions, rising inflation, and slowing economic growth in major economies. These factors can have a ripple effect on the GBP/USD exchange rate and contribute to a potential breakdown.
3. Interest Rates: The interest rates set by the Bank of England and the US Federal Reserve also play a crucial role in the stability of the GBP/USD exchange rate. Any significant changes in interest rates can impact the flow of capital and foreign investment, leading to volatility in the exchange rate.
How to Prepare for a Potential Breakdown:
While it is impossible to predict the exact outcome of the GBP/USD exchange rate, it is always wise to be prepared for any potential breakdown. Here are some practical tips on how to prepare for such a scenario:
1. Stay Informed: As an investor or a trader, it is crucial to stay informed about the economic and political events that could impact the GBP/USD exchange rate. Keep an eye on news sources and market analysis to track any significant developments that could potentially cause a breakdown.
2. Diversify Your Portfolio: One way to mitigate the risks of a potential breakdown is to diversify your portfolio. Instead of relying solely on the GBP/USD exchange rate, consider investing in other currencies and assets to spread out your risk.
3. Consider Hedging Strategies: Hedging is a risk management strategy used to protect against potential losses. You can use derivatives such as options and futures to hedge your positions in the event of a breakdown.
4. Consult with a Financial Advisor: If you are unsure about how a potential breakdown could impact your investments, it is always a good idea to consult with a financial advisor. They can provide personalized advice and strategies based on your risk tolerance and financial goals.
Case Study – 2016’s Brexit Result:
One notable case study that demonstrates the impact of political events on the GBP/USD exchange rate is the 2016 Brexit Referendum. The UK’s vote to leave the EU resulted in a sharp drop in the GBP/USD exchange rate, with the pound falling to its lowest level in over three decades. This sudden and significant move caught many investors off guard, highlighting the importance of staying informed and prepared for potential market shifts.
First-hand Experience:
“I had a significant portion of my portfolio invested in GBP/USD when the Brexit vote happened. Despite my research and analysis, I did not anticipate the sharp decline in the exchange rate. It was a tough lesson, and since then, I have diversified my investments and regularly stay updated on political and economic developments that could impact the currency pair.” – John, experienced forex investor.
Conclusion:
Whether the GBP/USD exchange rate is on the brink of collapse or not, it is essential to be prepared for any potential market shifts. Stay informed, diversify your portfolio, and consider hedging strategies to mitigate risks. Consulting with a financial advisor and learning from past events can also provide valuable insights into how to handle a potential breakdown. Ultimately, it is crucial to stay cautious and adapt your investment strategies accordingly to weather any market uncertainties.
