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GBP/USD volatility likely to return, with the BoE kicking off key period

Sterling has been in consolidation mode as traders react to the electoral uncertainty ahead. With the economic calendar packed, GBP/USD volatility looks likely to come from a different angle.

PMI rebound fails to lift the pound

The pound has been in a holding pattern over the past week, with traders unable to truly act with conviction given the huge political and economic uncertainty that lies ahead. The past three trading days have brought about greater clarity over the current trajectory of UK business, with purchasing managers index (PMI) surveys from manufacturing, construction and services.

By and large those leading economic indicators have provided us with an improved outlook, with gains across the board for the month of October. However, there are some caveats worth noting here. Firstly, the manufacturing sector received a sharp boost last month thanks to stockpiling which has been evident in the month leading up to each previous Brexit deadline. The extension to that 31 October deadline for Article 50 to run out ultimately averted a no-deal Brexit.

However, foreign businesses have been forced into stockpiling UK products and inputs ahead of each Brexit deadline. With that in mind, it is likely that this boost is reversed in the forthcoming months, negating much of the current resurgence.

Elsewhere, while we have seen improvements in the construction and services number, one remains well in contraction territory, while the other has only just about managed to claw itself back to neutral with a reading of 50.

Bank of England shifts focus to inflation report estimates

Next up we see the Bank of England (BoE) provide their latest rate decision, which is accompanied by the inflation report. With both election and Brexit uncertainty looming large, there is little to point towards any shift in policy from the monetary policy committee (MPC). However, markets will seek further clarity on what the bank plans to do in the event of each outcome. It is highly like that a no-deal Brexit would bring about a subsequent rate cut. However, the action in the event of UK Prime Minister Boris Johnson’s deal remains less clear.

Also keep an eye out for the latest estimates from the BoE, with growth and inflation estimates likely to be crucial in reflecting where the committee sees the economy moving in the years ahead. Certainly, the subject of growth will remain relevant for the week ahead, with Thursday’s BoE estimates being followed up by the actual third-quarter (Q3) preliminary gross domestic product (GDP) reading on Monday. That comes alongside the monthly figure for September.

With political uncertainty remaining a key figure for traders, we are likely to see GBP sentiment driven more by economic concerns for the time being. With that in mind, traders will be keenly watching the data deluge coming out of the UK next week. Monday sees industrial and manufacturing production alongside those GDP figures.

Tuesday brings the latest jobs report, following an eight-month low for the claimant count. On Wednesday we see inflation, amid a decline that has seen consumer price index (CPI) drift into a two-year low of 1.7%. And finally, Thursday highlights the actions of UK consumers, with the retail sales figures grabbing the headlines ahead of an important festive period for the high street.

Sterling awaiting breakout from recent consolidation

GBP/USD has largely been in consolidation mode over the past three weeks, with neither selling nor buying pressure managing to really take shape in any meaningful way. With the pair currently trading in a more bearish trajectory, there is a strong chance that we will see further downside if $1.2876 is broken. For the wider picture to resolve, we would need to see a break through either $1.3012 or $1.2788 levels. Until then, traders will have to remain flexible to react to any significant shifts in the economic and monetary policy picture.

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.

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