GBPUSD Analysis (Sept, 2021) Inflation Risk & Staff Shortage
Companies across the UK are currently facing a rising battle of keeping talented staff in the company but also recruiting new talent. These two factors are causing prices to rise, especially in the supply chain sectors. Heavy goods vehicle drivers are one of the main types of employees that are being scouted and sought after, companies are offering them better salaries, bonuses and incentives to continue working at their company.
This however, has started to create a rise in food prices which is an early warning sign of inflation.
These early signs could be an indication that the Bank of England and the UK government will start to intervene in the markets. What may happen is a reactionary interest rate hike to curb inflation and reduce money supply.
Throughout this analysis our indicators are showing early signs of an upcoming bullish move but only time will tell if this trend continues.
Logikfx Technology Summary
This week we're seeing an interesting phase as currencies are starting to congest with fundamental data suggesting similar signals on both sides. GBPUSD was as an interesting pair to consider due to an overall rise in strength since mid August and majority of the economic indicators suggesting a bullish continuation.
Currently the following indicators are showing bullish signs:
The only conflicting one was the interest rate differentials indicator which saw bearish signs.
Macro currency strength meter
The macro currency strength meter over the past few weeks has started showing early interesting signs for a bullish GBPUSD move. The image above shows in green the uptrend in macro data for GBP and the down trend in data for USD.
This combination if continues will start to generate a stronger bullish conviction on GBPUSD.
Currently, both currencies are still within the negative region meaning we may want to wait a week or two to see if one GBP continues to strengthen and two USD continues to weaken.
GDP Differential Indicator
The GDP differential indicator shows us the output of each country selected, in this case we can see that the UK is expected to outgrow the US in the coming year.
This is bullish for GBPUSD.
What's interesting is that 2022 will be the first time the differential crosses 0 meaning if the bullish GDP trend continues we may see GBP trend upwards for the years to come.
Trade analysis (Imports/ Exports)
Ford motors was one of the companies stock analysed against GBPUSD, this was to assess the currency correlation between the two and if we can uncover any anomalies in the data. What we saw is that Ford actually has a 66% positive correlation against GBPUSD.
This means 66% of the time as Ford Motor prices rise GBPUSD follows.
You can see the relationship hold true the past 5 years.
Starting from Jan 2015 we can see Ford motors take a hit following a massive down trend all the way to 2020. This is where there was a huge reverse and actually Ford started to gain which saw GBPUSD bottom out and up trend.
What we're seeing now is Ford prices slightly dipping which means we may see a slight correction in GBPUSD.
Gold was an interesting commodity due to the UK holding, storing and importing vast amounts of it. We found that Gold prices have a negative 5% correlation against GBPUSD.
What we're seeing right now is that Gold prices have been rising since August over the past couple months. This should result in a potential downside correction in GBPUSD, however, with the weak correlation this may not happen.
WTI... crude oil is a major commodity that not only the US exports but also the UK exports and purchases from across the world.
What we can gather straight away by just looking at the correlation is that there's a strong positive correlation between WTI and GBPUSD.
The most recent data shows WTI prices rising which could result in GBPUSD following suit.
Make sure to keep an eye on these commodities/ companies over the coming weeks to get a better idea of the trend and confirmation signals.
Interest Rate Differential Indicator
The interest rates differential indicator gives us a great view of hot money flowing between countries. Investors prefer to earn interest on the base currency they're holding.
In this case we can actually see that the UK has very low interest rates in comparison to the US which shows actually investors may prefer to invest in the United States.
This is why interest rates were bearish on the technology summary above.
Stock Market Analysis (FTSE100)
The FTSE100 is an index which tracks the UK's top 100 companies, what we can grasp from the chart is that over the past year or so the pandemic has caused a huge slump. Companies are now recovering as the lockdown has ended and business is open as usual.
What we're seeing is the FTSE100 priced in USD starting to reach new highs.
If this trend continues we'll not only see a stock market recovery but potentially GBP to strengthen too.
Hedge Fund Positioning (COT Analysis)
Finally, we're onto the hedge fund positions to see what's going on from a volume perspective. What we can see straight away is that hedge funds are buying the GBP and selling the USD. There's no doubt about it.
In this case we can see that over the past 2 months this has been the case, so if we were to be bullish on GBPUSD we would be trading with the market and not against it.
Price Trends
Current price trends are quite simple we're seeing a double bottom forming with prices pushing upwards. If the fundamentals continue in favour we may see GBPUSD reach higher highs.
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