The pound continued to strengthen against the US dollar yesterday and is trading around 1.3448 today.
However, recent UK economic data have been disappointing. According to Lloyds Bank, house prices fell by 0.6% month over month in October, although an increase of 0.1% had been expected. No data was released yesterday that could offset this negative signal. Today, the only release was the BRC Retail Sales Monitor, which tracks retail sales performance. Its October reading came in at 1.1%, compared with a forecast of 1.2%, following a reading of 1.0% in the previous month. This was slightly below expectations, but the difference was so small that the market barely reacted.
The Bank of England's position is far more important. On November 5, it raised its interest rate to 4.00%, with all nine members of the Monetary Policy Committee voting in favor. By comparison, only three members had supported a rate increase in September, indicating a significant shift toward a more hawkish stance within the Bank. Following the decision, Andrew Bailey said that a second rate increase was more likely than not, provided energy prices returned to their previous levels. The market currently sees the probability of a December rate hike as roughly 50%, and Bailey reaffirmed his hawkish position yesterday. It is worth noting how differently his previous statements affected the market. On October 14, he spoke about social media without mentioning interest rates, and the pound immediately entered a correction. On November 5, he made important comments, but the pound still declined because the US dollar received support from strong American economic data.
The Federal Reserve's position is more clearly defined. Its interest rate stands at 3.75%–4.00%, while the probability of a rate increase at the December 9 meeting is close to 80%. Federal Reserve officials Austan Goolsbee and Tom Barkin again identified inflation as the main concern yesterday evening, and such comments would normally put pressure on the pound. However, this time the reaction was different. US wholesale inventories, which represent goods held in storage by wholesalers, increased by 0.7%, compared with a forecast of 0.6%, but this failed to restore demand for the dollar. This means that the Fed's stance is more hawkish, yet the pound continues to rise. Therefore, the explanation lies not in UK economic news but in the US dollar's own weakness.
Only one UK event is scheduled for today: a speech by Sarah Breeden, a member of the Bank of England's Financial Policy Committee. Her comments will provide the market with another indication of the Bank's position. If her tone is hawkish, this could support further gains in the pound, as traders will immediately recall the unanimous decision on November 5 and the division within the committee in September. Neutral comments without any indication of the Bank's interest rate outlook, by contrast, could slow buying activity.
Momentum
The price is currently trading within a range between 1.3431 and 1.3460. As long as it remains between these levels, the market is moving sideways and searching for direction. A move beyond the range is known as a breakout, but merely touching either boundary is not enough. Price consolidation beyond the level is required, meaning that several consecutive five-minute candles must close above or below it. Without this confirmation, a breakout often turns out to be false.
The upper reference level is 1.3460. Consolidation above it would open the way toward 1.3481 and then 1.3501. The final target is close to a psychological round-number level, where the market often slows down, so taking partial profits at the first target would be a reasonable approach. This is considered the primary scenario. The trend over the past 24 hours has been upward, the pair is holding above Friday's level, and hawkish comments from Breeden, along with softer US inflation data, could provide additional support for buyers.
The lower reference level is 1.3431. Consolidation below it would open the way toward 1.3399 and then 1.3371. Recent price action is largely working against this scenario. However, it could develop very quickly if US inflation comes in high, as the price is currently just 17 points away from the lower boundary, just as it is from the upper one. Therefore, it would be unwise to favor either scenario in advance. Waiting for the market's reaction to the economic data would be the more prudent approach.
Mean Reversion
There are two levels to watch here: 1.3455 and 1.3428. Both are located very close to the breakout boundaries. The upper reference level at 1.3455 is just five points below 1.3460. If the price rises into this zone, fails to hold there, and then moves lower, short positions can be considered, with a stop-loss placed slightly above 1.3460. However, if the pair consolidates firmly above 1.3460, this would constitute a breakout, and selling at that point should be avoided. Given how close these levels are, it is impossible to distinguish between the two scenarios based on the initial touch alone. The difference may become clear within just a few minutes, so it is better to avoid trading the initial reaction in this zone and wait for a clearer picture.
The lower reference level at 1.3428 is just three points below 1.3431, leaving even less room for error. The approach here is the reverse. The price breaks below 1.3431, reaches 1.3428, fails to continue lower, and then moves back above the level. Only then should long positions be considered, with a stop-loss placed below 1.3428, allowing for an appropriate buffer. This scenario is likely to work if US inflation comes in close to expectations and the market retraces after its initial reaction. However, if the price consolidates below 1.3428, the rebound scenario is invalidated and the downward breakout takes precedence. In that case, opening short positions in the direction of the breakout would be safer than trading against the prevailing movement.
