Sterling has depreciated sharply against the US Dollar since mid-January, a trend that intensified last week after the Fed reassured the financial world that interest rate rises were inevitable in the near future.

  • UK inflation has surpassed 5% and there will be an important Bank of England (BoE) meeting for the Pound on Thursday
  • At this point, the market is pricing in a near 92% chance of a rate hike
  • On the technical chart of GBP/USD an inside bar formation has formed

The UK is struggling with inflation. Will the BoE react?

The UK is struggling with inflation as seen on thechart below, BTW – like most countries in the world. The situation could get even worse if concerns over the threat of a Russia/Ukraine war escalate.

In the UK, the most important categories in the Consumer Price Index are Transport (16 per cent of the total weighting) and Leisure and Culture (15 per cent). Housing, water, electricity, gas and other fuels account for 13 per cent, restaurants and hotels 12 per cent and food and soft drinks 10 per cent.

Inflation in the UK, index CPI
Inflation in the UK

The index also includes: Miscellaneous Goods and Services (9 per cent); Clothing and Footwear (7 per cent); Furniture, Household Equipment and Maintenance (6 per cent). Alcoholic Beverages and Tobacco; Health, Communications and Education make up the remaining 11 per cent of the total weight.

This week (3 February) the Bank of England (BoE) is expected to announce its interest rate decision with a high probability (92 per cent) of a 25bp hike to 0.5 per cent. Rampant inflation is driven by labour shortages, supply chain bottlenecks and oil and gas prices. The need to combat inflationary pressures is increasing for the BoE, but the cost to economic growth cannot be underestimated.

The chart shows the excess wage growth resulting from the COVID-19 pandemic in early 2020.

The 0.5% figure is extremely important as the BoE has mentioned that quantitative tightening (QT) will begin once this level is reached.

Pound exchange rate with inside bar formation. Technical analysis GBP/USD

GBP/USD – the breakout from the inside bar may indicate the direction for the next sessions

Analyzing the chart of GBP/USD, we will notice that for the past two days the price has been moving within the range of Thursday’s quotations. An inside bar formation has appeared. Breakout in either direction from this formation may indicate the direction for the next sessions. In view of Thursday’s BoE decision and the anticipated interest rate hike, a breakout to the north seems very likely.

Support for the upward scenario will be provided by the MACD oscillator indications. If the indicator enters the upward phase during the breakout – it will be a strong signal for the buyers.

However, the second option – defeating the minimum of formation 1.3356 and heading to the demand zone 1.3220 is still in play. It seems that holding off from opening positions until Thursday will be the best solution.

The above analysis is based on the PA+MACD strategy, a detailed description of which you can read HERE . I will talk more about the PA+MACD strategy applied to these currency pairs during the live trading sessions which you can attend from Monday to Friday.
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