Inflation has played a large role in the decline of global markets in 2022.
Whether it’s stock market up-and-comers like Coinbase Global Inc. COIN or Wall Street sweetheart Apple Inc. AAPL, inflation has been plaguing the stock prices of nearly all stock market securities.
The U.S. Federal Reserve has been combatting the rising prices of commodities by manipulating the federal funds rate, which so far has increased four times this year.
Last week, the Bank of England began intensifying its own counter-inflationary measures. With consumer price inflation in the United Kingdom set to top 13%, the bank declared a 50 basis point rate hike, the largest increase in 27 years.
The rate hike has many pondering the implications it has on different markets. Academic studies have shown that inflation has a negative correlation to the performance of stocks, but what does it mean for commodities like the GDP/USD pair?
GBP/USD’s Reaction To Inflation
While acknowledging that all estimates are, at best, educated guesses, one can potentially form a hypothesis as to how GBP/USD could react to the latest news.
Most of these guesses arise from analyst work and historical performance. However, please be aware that past performance is not indicative of future results.
For example, it’s a generally accepted principle that increasing interest rates typically attract global investors. As interest rates go up, interest in the local currency goes up. However, this does not always occur, especially in a smaller trading time frame.
When the news was released of the interest rate hike on Aug. 4, the GBP/USD chart declined significantly. The 15-minute chart looked like this:
A similar rate hike in December 2021 saw a completely different market reaction, as demonstrated by the image below.
The two examples show the complexity of predicting the movement of a currency pair shortly after a rate hike on a technical level. On a macro level, complications are further compounded by numerous factors, including GDP growth and labor market data.
The multitude of factors influencing currency pricing is reflected by a statement from Eren Sengezer, European Session lead analyst at FXStreet, who said:
“A 50 bps rate hike by itself could trigger a ‘buy the rumor sell the fact reaction and cause the British pound to weaken against its rivals. In that case, investors will pay close attention to the vote split. If the policy statement reveals that some policymakers wanted to raise the rate by 75 bps, this could be seen as GBP-positive development. On the other hand, the sterling could face additional selling pressure in case markets see that some policymakers preferred a 25 bps hike.”
Inflation News: What Is Certain?
In the wave of ambiguity surrounding the recent rate hike’s influence on the GBP/USD forex pair, one thing remains clear: Macroeconomic factors invite volatility, and volatility can theoretically be capitalized upon by traders. On the contrary, traders should be aware that trading during times of extreme volatility can be risky.
Volatility amid the release of important macroeconomic factors is not a new occurrence. In the midst of Brexit, the GBP/USD pair moved 300 pips in just a couple of hours. Luckily, services like FOREX.com are providing traders with the platform to trade the GBP/USD pair with ease.
Offering high liquidity and tight spreads, this pair is affected by economic indicators from the U.K., the U.S. and around the world, arguably making it a textbook trading vehicle for the current news.
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Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.
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