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Abstract: Compared with the change of the two-year swap interest rate difference in the U.S., the exchange rate of the GBPUSD should be closer to 1.2000 than the current 1.2260; In this context, the GBPUSD is conducive to further decline. However, the level of activity in GBPUSD relative to other USD-related pairs is more likely to favor a rise rather than yielding to fair spreads.

Fundamentals

Speculation about the Bank of England's (BOE) interest rate cut has increased, weakening the trend of the GBP. Due to the positive attitude towards the global economy, the global stock market failed to rise further. This combination has weakened the support for the GBP, and the GBPUSD has fallen back to 1.2250.

However, there are various opinions on the market now. One view is that the UK economic activity has declined, while the U.S. economic data continues to rise. Given the weak pulse of the global economy and limited potential for policy support, global risk appetite is unlikely to rise sharply. (bearish for USD)

Another view is still cautious about the current selling of USD. The economic development of the U.S. has opened a window for the weakness of the USD, but USD bears should ask how long this situation will last. However, the U.S. exceptionalism still exists, because the economic base of other countries in the world seems to be more fragile than this time last year. (bullish for USD)

Mitsubishi Financial Group believes that the BOE's current communication with the market will be divided into four clear stages. The first two stages emphasize the need to raise interest rates, and then insist that interest rates must remain high for a longer period. The third stage will convey the possibility of further interest rate cuts, and then hint that interest rate cuts are coming.

Mitsubishi Financial Group said that "given that we are definitely at the forefront of inflation in the UK in line with other regions, the BOE is likely to be more confident in making such a statement".

The BOE pointed out that the October inflation data released next week will inevitably show a sharp drop in inflation, because the annual calculation will include the increase in retail energy prices since October 2022.

The BOE believes that since the annual consumer price index (CPI) rate may fall below 5.0% next week, the BOE can pay more attention to economic growth and economic activity indicators than a few months ago. It added that " with the end of the year approaching and 2024 on the horizon, this shift in focus will surely mean a more dovish statement from the BOE".

"Further evidence like the slowdown in wage growth is crucial for early signs that the shift in the statement is continuing."

In our view, with inflation expected to fall sharply again in October, the market could see the BOE hinting at a rate cut in mid-2024, contradicting previous attempts by BOE officials to push for "higher rates for longer". There is scope for further dovish repricing in the BOE's expectations going forward.

The market expects the UK to cut interest rates by 30 basis points by August 2024, which looks quite modest compared to expectations in the U.S. and Eurozone. We expect the GBPUSD exchange rate to be 1.2000 at the end of 2023.

Technical Analysis

The GBPUSD's intraday bias remains neutral for now. On Friday, the rise in the GBPUSD relative to the AUDUSD and EURUSD over the same period was more prominent, and it has now broken above the key previous resistance at 1.2338 (representing the level of activity in the GBPUSD).

As long as the bulls hold at the 55 EMA (currently 1.2239) in the 4H timeframe, it will be favorable for further gains. A decisive break above the 38.2% Fibonacci retracement at 1.2458 from 1.3141 to 1.2036 would pave the way for a test of the 1.2530 range. However, a sustained break below 55 EMA in the 4H timeframe will revive recent bearish sentiment and may retest the low of 1.2036.

From a broader perspective, the GBPUSD favors a decline, but a possible rebound is still expected before then. It is recommended to buy the dips. (For test only. Do not follow)

Trading Recommendations

Trading direction: Long

Entry price: 1.2250

Target price: 1.2536

Stop loss: 1.2150

Deadline: 2023-11-22 23:55:00

Support: 1.2239, 1.2224, 1.2203

Resistance: 1.2338, 1.2430, 1.2511