Carney’s hint of gradual rate hikes turn Pound bearish

The GBP/USD pair had rallied about 500 pips in the past one week to hit a high of 1.3618 on Monday. The rally was triggered after the Bank of England’s Governor Mike Carney stated that there is a possibility of a raise in the benchmark interest rates in the coming months.

The Greenback, in the meanwhile, weakened due to a decline in the US retail sales and industrial activity. Now, the GBP/USD pair, which is trading at about 1.3520, is expected to decline due to the arguments presented below.

A survey conducted by CNBC showed that 76% of respondents anticipate a Fed rate hike in December.

Furthermore, respondents expect between two and three rate hikes in 2018. At a benchmark rate of 2.9%, the Fed is expected to complete its rate hike cycle in 2019. Nearly 68% of those polled, which includes fund managers, currency strategists, and economists, expect the Fed to begin downsizing its $4.5 trillion balance sheet. Only 19% of those surveyed anticipate a possibility of another recession.

Financial Times

In a report, the US Census Bureau stated that the housing starts fell to 1.18 million in August, from an upwardly revised 1.19 million in the prior month, but greater than 1.17 million anticipated by analysts. The slight decline in the housing starts is mainly due to the impact of hurricane Harvey and Irma.

However, the number of building permits rose 5.7% to a seasonally adjusted 1.30 million units in August, from 1.23 million (upwardly revised from 1.223 million) in July. Economists had forecast a 0.8% decline to 1.22 million housing permits in August. While the US dollar is driven up by strong economic data, concerns over future rate hike has sparked a profit booking in the Pound.

According to Kit Juckes at Societe Generale in London, the recent recovery in the Pound may not last long as the market may not appreciate a stand alone rate hike. Juckes argues that the Euro dollar is driven by economic recovery and upcoming ECB tapering, while the Pound has gained ground purely based on a rate hike expectation. Now that Mike Carney has hinted that the frequency of rate hike would be slow.

Additionally, the UK is yet to attain a breakthrough in the Brexit negotiation. Thus, fundamentals favor a deeper correction in the GBP/USD pair at this point in time. The price chart shows technical resistance for the GBP/USD pair at 1.3560. The exhaustion is also indicated by the declining momentum indicator. On the downside, support for the currency pair exists at 1.3230.

To benefit from the analysis, we may open a short position in the GBP/USD pair near 1.3510 in the Forex market. To mitigate risk, a stop loss order will be placed above 1.3610. The trade will be closed when the pair declines to 1.3310.

On the basis of this analysis, we may invest in a put option or its equivalent offered by a suitable binary broker. We will enter only if the pair is trading near 1.3510. An option expiration date around September 28th is preferred for the trade.