GBP PRICE, NEWS AND ANALYSIS:
- GBP/USD is holding its ground around the 1.36 level as a 15 basis point increase in UK Bank Rate by the year-end edges closer.
- The latest UK employment report was broadly positive but the background remains unhelpful as higher energy prices continue to benefit haven assets like USD.
GBP STEADY, UK RATE INCREASE EXPECTED
GBP/USD continues to trade around the 1.36 level, helped by expectations that the Bank of England will increase its benchmark Bank Rate by 15 basis points to 0.25% later this year and perhaps to 0.5% next year.
Michael Saunders, an external member of the Bank’s monetary policy committee, warned at the weekend that markets should get ready for significantly earlier interest rate rises as UK inflation pressure mounts. BoE Governor Andrew Bailey was also hawkish, saying that inflation running above the target of 2.0% is concerning and must be managed to prevent it from becoming permanently embedded, and that has helped Sterling so far this week and could continue to do so.
GBP/USD PRICE CHART, TWO-HOUR TIMEFRAME (SEPTEMBER 28 - OCTOBER 12, 2021)
Source: IG (You can click on it for a larger image)
UK UNEMPLOYMENT RATE FALLS
Turning to the data, the latest UK jobs report showed the unemployment rate falling to 4.5%, in line with expectations, employment increasingby 235,000 versus expectations of 243,000, and average earnings including bonuses up 7.2% versus expectations of 7.0%.
Source: DailyFX calendar
WARNING ON SPENDING
The data came as market concerns remain that high energy prices will lead to more inflation and rising bond yields. That is broadly positive for GBP and, so far, traders have largely ignored the UK’s clashes with the EU over Northern Ireland and with France over fishing.
Moreover, there is no room for big spending on UK public services in the October 27 Budget, according to the Institute for Fiscal Studies think tank. It reckons borrowing will be lower than forecast but that Chancellor Rishi Sunak, who is planning major tax rises, will still have to keep a tight rein on spending.
BULLISH SIGNAL FROM SENTIMENT DATA
As for market positioning, IG client sentiment data are sending out a bullish signal for GBP/USD. The retail trader data show 54.69% of traders are net-long, with the ratio of traders long to short at 1.21 to 1. The number of traders net-long is 6.71% higher than yesterday but 3.84% lower than last week, while the number of traders net-short is 11.11% higher than yesterday and 14.17% higher than last week.
Here at DailyFX we typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall.Yet traders are less net-long than yesterday and compared with last week. These recent changes in sentiment suggest that GBP/USD may soon move higher despite the fact that traders remain net-long.
Written by Martin Essex, Analyst, 12th October 2021. DailyFX