After several attempts to stand firm, the US dollar succeeded in advancing again, and and the GBP/USD moved to the 1.3668 support level on Friday, which saw a strong rise of the US dollar against the other major currencies. The steadfastness shown by the pound was sufficient to move the pair towards the 1.3830 resistance. The GBP/USD witnessed its biggest daily drop in a month on Friday, after it fell when the dollar rose in clear response to data showing that inflation rates in the United States are rising at high levels through the fastest wage growth in decades.
The US dollar was bought on a large scale, leading to sharp declines for all currencies when measured against the dollar after the Bureau of Economic Analysis said its Employment Cost Index rose 1.3% in the third quarter in a development that was driven by a 6% year-on-year increase in labor wages.
The type of outcome is that could trigger a rate hike from the Federal Reserve (Fed), which will announce its November monetary policy decision next Wednesday, and likely update its rate guidance as a result. In the same report, the Bureau of Economic Analysis also said that the Fed's preferred measure of inflation rose from 4.2% to 4.4% in September, putting it above the average target of 2%.
Accordingly, says Catherine Judge, an economist at CIBC Capital Markets, “The Fed’s preferred rate measure, which is core PCE prices, remained steady at 3.6% year-on-year in September, below consensus expectations as it rose slightly to 3.7%. on an annual basis. When compared to the pre-pandemic level, which eliminates the underlying effects, it still looks hot at 2.7% annually, which supports the pending Federal Reserve decision to start reducing bond purchases.”
The PCE Price Index was unchanged at 3.6% if food and energy costs were excluded from the basket of prices measured, although it is not clear that this would be very significant for the Fed in light of developments related to wages.
“The risk is that persistent high inflation will start to push price and wages to expect unwarrantedly high rates of inflation in the future,” Federal Reserve Chairman Jerome Powell said in a panel discussion at the South African Reserve Bank's Centenary Conference on October 22. “So we need to make sure that our policy is in a position to address the full range of reasonable outcomes and we will be watching carefully to see if the economy is developing in line with expectations and our policies will need to adjust accordingly."
The Federal Reserve is widely expected this week to announce plans to phase out its $120 billion per month quantitative easing program over the months to 2022, while the Fed's latest single-point forecast chart indicates that It may start raising interest rates by the end of 2022.
Only one interest rate increase has been suggested, which would increase the Fed funds rate range to between 0.25% and 0.50%, although the risk is that inflation and wage developments lead to a greater number of rate increases that come sooner than the financial market forecast.
Technical analysis
This week, Forex traders will analyze the policy of the Bank of England and the Federal Reserve, which will determine the fate of the GBP/USD. The pair may collapse if it moves towards the support levels 1.3660, 1.3550 and 1.3420. On the other hand, the bulls will have the strongest control over the trend by moving towards the 1.4000 psychological resistance, which the rebound attempts throughout October failed to move towards.
Today, the British Manufacturing PMI will be announced, followed by the US ISM Manufacturing PMI.
