GBP/USD Weekly Forecast: Pound Sterling posts second straight week of gains despite renewed US Dollar strength
- The Pound Sterling hit two-month highs above 1.2750 against the US Dollar.
- The GBP/USD uptrend is likely to stay intact in the holiday-shortened week ahead.
- The Pound Sterling eyes 1.2900 amid double bullish crossovers and RSI.
The Pound Sterling (GBP) managed to eke out minor gains against the US Dollar (USD) this week after the GBP/USD pair touched the highest level in two months above 1.2750.
Pound Sterling gives in to the US Dollar resurgence
Having started the week on the front foot, the Pound Sterling struggled to resist the US Dollar resurgence, but GBP/USD eventually posted mild gains, extending the previous week’s rebound.
The hawkish sentiment surrounding the fading expectations of interest rate cuts by both the Bank of England (BoE) and the US Federal Reserve(Fed) emerged as the underlying theme this week, with resurgent US Dollar demand partly offsetting the optimism seen around the British Pound.
Monday’s holiday-thinned conditions kept the pair in a familiar range around 1.2700 but it was the hotter UK Consumer Price Index (CPI) report on Tuesday that endorsed a fresh advance in the Pound Sterling, prompting GBP/USD to extend its strength into the first half of Wednesday’s trading.
The Office for National Statistics (ONS) said Tuesday that inflation, as measured by the CPI, fell to 2.3% in the year to April, down from 3.2% in March. The reading, however, surpassed the market expectations of a deeper slowdown to 2.1%. Services inflation declined to 5.9% YoY in April, as against March’s reading of 6.0% and the estimated 5.4% figure.
The slower-than-expected decline in inflation dashed hopes of a June BoE rate cut, lifting the GBP/USD pair to fresh two-month highs of 1.2762 in the aftermath.
However, the hawkish Minutes of the Fed’s May policy meeting combined with the recent cautious remarks from several Fed policymakers pushed back against aggressive Fed rate cut expectations and revived the demand for the US Dollar across the board, triggering a retracement in the pair.
The Fed Minutes released on Wednesday showed that “various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.” The Minutes also suggested that the Fed officials grew more concerned about the stubbornness of inflation.
A recent slew of speeches from several Fed policymakers have also warranted caution on the persistence of inflation, leaning in favor of delayed rate cuts.
Meanwhile, data on Thursday showed that the preliminary US Composite PMI, which tracks the manufacturing and services sectors, jumped to 54.4 this month, registering the highest level since April 2022 and following a final reading of 51.3 in April.
Robust US data affirmed the economic resilience and further tempered bets of a dovish Fed policy pivot later this year, providing a fresh boost to the Greenback at the expense of the Pound Sterling.
GBP markets also turned cautious following the confirmation of the UK general election on July 4.
Hawkish Fed expectations continued to dent risk sentiment, further acting as a headwind to the risk currency British Pound on Friday. Meanwhile, downbeat UK Retail Sales data for April offered extra legs to the GBP/USD correction.
The UK Retail Sales dropped 2.3% over the month in April vs. -0.4% expected and -0.2% in March, the latest data published by the Office for National Statistics (ONS) showed Friday. Despite the initial decline following the data, the Pound Sterling managed to gain some ground and remained above 1.2700, as the improving risk mood didn’t allow the USD to preserve its strength heading into the weekend.
What to watch for in the US inflation week.
It’s yet another holiday-shortened week, as the US and the UK traders will be away on Monday, enjoying their Memorial Day and Spring Bank Day long weekend, respectively.
Tuesday and Wednesday are quiet in terms of data releases from both sides of the Atlantic but Fed speakers are likely to dominate, with the US Dollar price action expected to drive the GBP/USD pair.
The second estimate of the first-quarter US Gross Domestic Product (GDP) will be reported on Thursday. At the same time, the weekly Jobless Claims will be released, followed by the Pending Home Sales.
The high-impact US Core PCE Price Index, the Fed’s preferred inflation gauge, will stand out on Friday amidst other low-tier US macro data.
GBP/USD: Technical Outlook
As observed on the daily chart, GBP/USD has been traversing in a seven-week-long rising wedge formation.
In order to invalidate the bearish wedge, the pair needs to yield a daily closing above the upper boundary of the pattern, aligned at 1.2765.
Acceptance above the latter would negate any near-term bearish bias, opening the door for a retest of the March 21 high of 1.2804.
The next topside barrier is seen at the March 8 high of 1.2894, above which a test of the 1.2950 psychological level will be inevitable.
The double bullish crossovers charted this week justify the upside potential. The 21-day Simple Moving Average (SMA) and the 200-day SMA crossover occurred on Monday, while the 21-day SMA and 50-day SMA Bull Cross was confirmed on Thursday.
Additionally, the 14-day Relative Strength Index (RSI) holds well above the 50 level, currently at 61.50, suggesting that the upside remains intact for the Pound Sterling.
However, if buyers face rejection at the upside hurdle of the potential rising wedge, the immediate downside could be capped by the 100-day SMA at 1.2633.
Further south, the confluence zone of the 20-day SMA and the 50-day SMA at around 1.2580 will also test the bullish commitments.
The last line of defense for buyers is seen at the critical support near 1.2535, where the lower boundary of the wedge pattern and 200-day SMA intersect.
A sustained break below the latter will initiate a fresh downtrend toward the 1.2400 threshold.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.