Taking Stock of the Post-FOMC Relief Rally Reversal

Pound Sterling Price Outlook: EUR/GBP Covers Lost Ground, GBP/USD Slumps
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GBP/USD, FTSE Analysis

  • UK markets reverse after Bank of England Re-emphasizes Growth Concerns
  • FTSE’s turnaround: Sterling weakness supported FTSE rally before continuing decline
  • Key technical levels considered ahead of US NFP later today

UK Markets Reverse after BoE Raises Growth Concerns

The pound was the main beneficiary of the Fed’s admission that the rate setting committee was not considering 75 basis point rises at the recent May meeting or for future meetings despite lofty market expectations. Therefore, the 50 bps hike resulted in dovish repricing which saw the dollar trading lower, allowing GBP/USD a temporary reprieve from its relentless freefall.

Yesterday, the Bank of England (BoE) hiked rates by 25 basis points and emphasized its concern over declining growth in the UK, hitting real incomes as inflation surges higher. The bank expects GDP growth to zero out in Q2 2023 with inflation expected to reach 10% by year end. Growth concerns outweighed any hawkish perceptions of the hike which, similarly to the case with the Fed, lead to dovish repricing of sterling.

Key Technical Levels (GBP/USD and FTSE)

GBP/USD broke below the prior low of 1.2410 with ease and now tests the 1.2250 level identified in previous reports. 1.2250 will prove a crucial level as we head into the weekend as there is little standing in the way of a drop to 1.2200 if the level is breached with any reasonable follow through. Resistance comes in at 1.2410 followed by 1.2670

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow

The FTSE index initially responded well to the sterling weakness, spiking towards 7615 before succumbing to the global trend of equity sell-offs. Hiking into weakness is also taking its toll on future equity valuations given the challenges to growth and rising inflation. Support appears at 7400, with a brief challenge at 7280, before 7220 comes into view. Resistance comes in at 7565. Next week’s price action could be pivotal when considering the double top formation (bearish reversal pattern).

FTSE Daily Chart

GBP/USD, FTSE: Taking Stock of the Post-FOMC Relief Rally Reversal

Source: TradingView, prepared by Richard Snow

Risk Events to End the Week

To round off a rather heavy week, as far as scheduled risk events are concerned, we have the US non-farm payroll data where it is expected that the US added 391k jobs with the unemployment rate expected to drop to 3.5%. Expect volatility around USD crosses at the release but the longer lasting impact of the data is unlikely to derail the current trend of labor market tightness.

GBP/USD, FTSE: Taking Stock of the Post-FOMC Relief Rally Reversal

Customize and filter live economic data via our DaliyFX economic calendar

Massively One-Sided IG Client Sentiment Hints at Trend Continuation

IG client sentiment can often be helpful for trend trading strategies, as extensive research in the past has revealed a reluctance – on the part of aggregated retail traders – to trade in the direction of strong trends. Instead, there appears to be a preference to call tops and bottoms in strong trending markets with little success. These and more insights are available in our IG client sentiment guide below:

GBP/USD, FTSE: Taking Stock of the Post-FOMC Relief Rally Reversal

  • GBP/USD: Retail trader data shows 84.72% of traders are net-long with the ratio of traders long to short at 5.54 to 1.
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall.
  • The number of traders net-long is 15.27% higher than yesterday and 7.23% higher from last week, while the number of traders net-short is 13.45% lower than yesterday and 7.69% lower from last week.
  • Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBP/USD-bearish contrarianoutlook.

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX



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