Up until the last week of August, the GBP USD was in a position to post a gain for the month. This was before the economic outlook turned gloomy. At the forefront was a dismal consumer confidence figure. This news fueled selling pressure as traders began to abandon their long positions.
Like most economies the consumer is needed to provide growth. As consumer confidence falls, so does consumer spending. This report was bearish because it was a strong sign that the economy was in a position to falter, leading to speculation that the economy would fall into a recession.
About mid-month, the GBP USD surged to the upside, reaching its monthly high at 1.6618 after it was reported that inflation grew faster than estimated. Traders bought the Sterling in anticipation of a possible interest rate hike by the Bank of England. When inflation rises to unacceptable levels, often the central bank will raise interest rates to draw money from the economy.
This inflation-driven rally came to a screeching halt when it became clear that the weakness in the economy would mean the BoE would be in no position to begin hiking interest rates.
Additional bearish factors that helped pressure the British Pound were increased jobless claims and a weak outlook for the economy based on the BoE minutes. The latest release of the minutes from the August meeting showed that all nine members of the central bank’s Monetary Policy Committee agreed to hold the benchmark lending rate at a record low of 0.5 percent.
Unlike the U.S. Federal Reserve which claims to have more tools available to prevent another recession, the Bank of England seems to have its hands tied because of the high inflation rate. It is very difficult to propose additional quantitative easing when inflation is running high. Based on current economic conditions, don’t expect the BoE to begin raising rates soon. The key as to which way the GBP USD will move in September will be determined by the strength or weakness of the economy.
Technically, the GBP USD made a minor closing price reversal top. This is potentially bearish signal. How bearish the market gets will be determined by whether there is enough selling pressure to break through bottoms at 1.6111 and 1.5780. A pair of uptrending Gann angles at 1.6789 and 1.5509 suggests the British Pound may have an expanded range in September with a slight bias to the downside.