This week, the central banks of several leading countries of the world will hold their regular meetings. So, tomorrow the Bank of Japan will hold a meeting, and the US Federal Reserve will sum up the results of the two-day meeting. On Thursday, the Swiss National Bank and the Bank of England will indicate their position. Such an abundance of fundamental factors makes investors nervous, especially since almost all meetings of the central bank members will not be passable.
The British currency shows the strongest volatility. The pound fell by more than 200 points against the dollar – if last Thursday the pound was at 1.3852, then today the local four-week low (1.3640) was updated. The downward dynamics is due not only to the strengthening of the greenback (although the US dollar played the role of the first fiddle), but also to the weak positions of the pound. The pair's traders are noticeably nervous ahead of the meetings of the Fed and the BoE, reacting sharply to the comments and forecasts of the expert community.
Plus, the foreign exchange market is forced to react to the situation that has developed around the Chinese developer Evergrande. And if yesterday this fundamental factor supported the US currency (the dollar was used as a protective asset), today the degree of anti-risk sentiment has somewhat decreased - after public speeches by the management of the "guilty" developer. In particular, the top manager of Evergrande assured employees that the company is not in danger of bankruptcy. Almost all experts doubt this, but nevertheless, the comments of the "top" somewhat defused the situation in the financial markets. The US dollar, which yesterday strengthened its positions due to this fundamental factor, weakened its grip, including in a pair with the pound.
The focus of the market's attention has shifted again to the key (planned) events of the current week. In the case of the Fed, most analysts are confident that the US central bank will maintain a wait-and-see position tomorrow, but at the same time it will transparently hint at the curtailment of QE, which will begin in the coming months. If the Fed still presents a "hawkish surprise" to dollar bulls (by announcing a reduction in the pace of asset purchases and/or updating the point forecast of a rate increase towards 2022), the greenback will rush up throughout the market. But if the September meeting is held according to the "generally approved" scenario, the dollar will only stay afloat and, in fact, will maintain its current positions. Hawkish expectations will allow the US currency to dominate the entire market, but without "fanaticism" and excessive hype. In the context of the GBP/USD pair, this means that traders will focus on the main theses of the English central bank, which will be announced literally the next day.
The ongoing intrigue regarding the possible outcome of the BoE's September meeting also puts pressure on the pound. There is no consensus on the market about which way the pendulum will swing. On the one hand, the British central bank is predicted to be one of the most aggressive central banks among the leading countries of the world. BoE Governor Andrew Bailey said in early September that at the August meeting, the Committee was equally divided on whether the minimum conditions for an interest rate increase were met. Only the Reserve Bank of New Zealand can boast of such a hawkish attitude, which at the last meeting planned to increase the interest rate (the coronavirus prevented it).
On the other hand, not all experts share the optimism of their colleagues. In particular, currency strategists at UOB Group warned their clients that inflated expectations regarding the hawkish results (verbal nature) of the September meeting could lead to losses. Arguing their position, the analysts recalled that the so-called "Furlough scheme" for employees in the UK began to be curtailed only two months ago, which is why the members of the BoE are likely to want to look at the further development of the situation on the labor market after the expiration of the program. Let me remind you that the Labor Market Support Program, which has been in effect since March last year, has allowed saving more than 11 million jobs. But in the summer, they decided to gradually wind down the "Furlough scheme": from July 1, employers must pay 10% of the usual salary of their employees who are on forced leave, from August 1-20%, and so on.
Also, do not "flatter yourself" about the record growth of British inflation in August. The fact is that last year there was another incentive program "Eat Out to Help Out" in the country, which "lured" citizens to restaurants, cafes and pubs. The authorities wanted to help the affected catering sector, so they "paid" a significant discount, up to 50%. As a result, the prices of food in cafeterias and restaurants have significantly sunk. This program was in effect for a short time, prices have increased this year, but the gap with last year's low prices turned out to be significant. The structure of the August release suggests that the increase in prices in cafes, pubs and restaurants accounted for the lion's share of the growth in the consumer price index on an annualized basis. But in September (as well as in the following months), the influence factor of the "Eat Out to Help Out" program will not be effective, since its operation ended on August 31, 2020.
Taking into account the above factors, members of the British central bank may take a wait-and-see attitude, while voicing the existing risks. There they will put pressure on the British currency. The hawkish expectations regarding the results of the September Fed meeting will only increase the pressure on GBP/USD. Therefore, any corrective bursts are now advisable to use as an excuse to open short positions.
Technically, the pair on the D1 timeframe is on the lower line of the Bollinger Bands indicator, while the Ichimoku indicator has formed a bearish Parade of Lines signal. All this speaks of the priority of the downward direction. The strongest support level (the target of the downward movement) is at 1.3550 - this is the lower line of the Bollinger Bands on the W1 timeframe.
The material has been provided by InstaForex Company - www.instaforex.com