Yesterday, the US Dollar Index tested resistance at 100.00, hitting its best levels since May this year. Not only is 100.00 a nice, round, psychologically important level, but it also acted as resistance in May and August this year. So far, resistance has held, and the Dollar Index has subsequently retreated. The question now is whether this means that the dollar’s rally has topped, or if this is simply a brief pause ahead of another push higher.
In contrast, sterling found some support overnight ahead of the Bank of England’s rate decision. Yesterday, the GBP/USD dropped to a seven-month low before finding support just north of 1.3000. Much of this could be down to the dollar pullback. But a look at the GBP/USD chart is also instructive.
As we can see, earlier this week, cable broke below 1.3140, a level that acted as support in May and August. But it turned up sharply as it approached 1.3000 and hit a high of 1.3120 this morning. Will 1.3140 now act as resistance? Or was cable’s break of support towards 1.3000 too short-lived to be of any consequence?
Let’s see what transpires over the next few sessions. Much depends on the US dollar. If the Dollar Index has another run at 100.00 and manages a prolonged break of this resistance level, then sterling could be in trouble.
Source: TN Trader
As an aside, the Bank of England kept rates unchanged at 4.0%. Most analysts predicted that the Monetary Policy Committee (MPC) would prefer to hold off from cutting rates until after the budget later this month. But earlier this week, some analysts suggested that the Bank may choose to cut by 25 basis points.
This would be despite inflation running close to double the Bank’s 2% target. If the MPC had voted to cut rates at this meeting, it may have been viewed as a blatantly political move. It would certainly have helped the embattled Chancellor Rachel Reeves by cutting the cost of government borrowing.
In the end, the MPC voted for no change by the slimmest of margins, with four out of nine going for a cut, and five against. That suggests that they will cut at the next meeting in December. Given that the probability of a Fed cut next month has fallen sharply, here’s another reason why sterling may be out of favour.
