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Read on to take a look at our current outlook for the sterling-dollar currency pair.
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Sterling stalling?
Price action was very interesting last week, following the hawkish rate hike by the BoE (Bank of England).
Markets now price in 6.25% as the terminal interest rates by the BoE, but despite this GBP finished lower with “Support 1” being tested. Market selling of USD was reversed from the previous week, with Fed Powell doubling down on his hawkish stance on more rate hikes to come. Interest rate differentials between the UK and the US have remained elevated in favour of GBP, but we can see that there are signs of this stabilising.
The ongoing battle with inflation remains a key driver on the GBPUSD pair, with the impact on interest rate expectations. Markets will eventually have to weigh up the impact of higher interest rates on each respective economy and the strongest will likely make that respective currency stronger. Weakness in the UK property market from higher borrowing costs remains a key risk for the economy and GBP.
It’s a quiet week from the UK, with a final reading of growth for the first quarter in focus. We have several BoE members speaking this week also, with their comments on future policy to be the focus. News over the weekend suggested that the government may also get involved in taming inflation, so we will wait to see potential developments, which may change rate expectations.
From the US, Fed speak, GDP numbers, and core PCE inflation numbers will be in focus. Money markets are only pricing in one more rate hike by the Fed (Federal Reserve) this year versus Fed Powell’s comments suggesting more than one hike. USD demand could build should data suggest that more hikes need to be done. A breach of “Support 1” will likely see “Support 2” come into play.
Uptrend intact and more gains to come?
Last week, the higher-than-expected wage numbers indicated continued inflation pressures in the UK and the money markets ramped up rate expectations by the BoE (Bank of England), as well as pricing in interest rates that stay higher for longer, causing GBP to gain.
Broad weakness was also seen on USD, despite the hawkish pause statement from the Fed (Federal Reserve). Interest rate differentials in favour of the UK keep the pair supported with GBPUSD at 14-month highs.
This week, big focus will be on GBP and whether Wednesday’s inflation numbers and BoE meeting on Thursday will keep markets pricing in higher interest rates for longer. A combination of inflation falling faster than expected and a dovish outlook by the BoE would be needed to stop the gains for GBP. Otherwise, we could see rates heading towards “Resistance 1”.
Fed speak will be in focus this week for USD, with Fed Powell delivering his semi-annual monetary policy to the House on Wednesday. Hawkish cues will be looked for following the hawkish pause from the Fed last week. June’s services and manufacturing PMI numbers will be released on Friday.
Downtrend argument still building
This week, Fed speak alluded to the idea that the Fed (Federal Reserve) will skip a rate hike in June, but they may be open to a hike in July. So to no surprise, odds of a June hike dropped which saw renewed weakness in the USD. The big test was a move back to “Resistance 1” ahead of US job numbers.
The numbers came in strong, adding to ADP and JOLT numbers earlier in the week, causing USD to force a comeback at the end of the week.
This week, services and construction PMI numbers are the only major data points from the UK and we have several BoE (Bank of England) members speaking as well. Market pricing for additional rate hikes from the BoE remains aggressive, stoking up demand for GBP. Anything that counters this pricing will be negative for the currency.
Services PMI numbers are the only major data point from the US, so Fed speak will likely be the main contributor to any USD moves. Markets are now pricing in a low chance of a hike in June, but also continue to to trim the chances of rate cuts later in the year by the Fed. Anything to suggest a strong economy will likely add to USD gains.
Downtrend set to continue?
Demand for USD remained persistent for the third week in a row, with markets continuing to ease Fed (Federal Reserve) rate cut expectations this year. Even the market pricing in further rate hikes by the BoE (Bank of England) failed to support GBP last week.
News of a potential agreement for deferring the US debt calling has increased risk appetite causing GBPUSD to gain, but we look to see how rates react around prior support/ now “Resistance 2”.
Manufacturing PMI numbers are the only major data point from the UK this week and we have several BoE (Bank of England) members speaking as well. Market pricing for additional rate hikes from the BoE remains pretty aggressive, stoking up demand for GBP. Anything that counters this pricing will be negative for the currency.
Now that there is a bit of relief surrounding the US debt ceiling, it seems markets will refocus on inflation and the Fed’s expected rate moves. US job numbers in the form of ADP, JOLTS, and nonfarm payrolls will be key and anything to suggest the job market is still strong, then we would anticipate further gains for USD.
September uptrend support being tested
Market pricing on interest rate policies continues to be one of the key drivers on the GBPUSD pair and following data this week, resilience in the US economy and hawkish Fed speak can be seen. Divergence on rate policies between the Fed (Federal Reserve) and the BoE (Bank of England) has narrowed substantially. The pair now sit on the September uptrend support line and a breach through “Support 1”, opens the prospect of falling to 2023 lows.
This week, focus will be on how much data points can continue to ease rate cut expectations by the Fed this year. ON Tuesday, performance of the economy will be judged by PMI numbers, followed by estimates for growth in the first quarter of this year. Ultimately, stronger numbers here would suggest a resilient economy that could withstand further rate hikes if needed. Core PCE inflation numbers are expected to show inflation pressure rose in April, which should support more USD strength. On Wednesday evening, we get the minutes from the latest Fed meeting, where we will be looking for cues on future Fed rate policy.
This week, the key data will be April’s inflation numbers on Wednesday. Currently, markets are expecting year on year inflation to drop from 10.1% to 8.2% with the core inflation number expected to fall to 6.1%. Lower numbers than this and we could easily see markets ease rate hike expectations for this year, which would be negative for sterling. On Tuesday, we have May’s PMI numbers and finishing the week we have April’s retail sales numbers.
Ultimately, “Support 1” is the key level that will be the measure of whether the markets continue to have appetite to drive the GBPUSD pair lower.
May 2022 high puts up resistance
Last week, the May 2022 high was reached, where we saw a lot of USD buying following the BoE (Bank of England) meeting, as well as safe haven buying as US debt ceiling talks continue. “Support 1” and “Support 2” could draw in more buyers of GBP to keep the GBPUSD uptrend intact and again test “Resistance 1”.
From the UK this week, focus will fall on Tuesday’s job and wage numbers. Rising wages remains a chief concern for the BoE (Bank of England) in their battle against inflation. A higher print this week will likely lead to markets adding onto raising interest rate expectations, and should see GBP continue to climb.
April’s retail sales numbers and continued debt ceiling talks will be the main focus from the US, with the latter most likely to take precedence for USD moves. Continued concerns of the US defaulting should add to more safe haven buying of USD, taking the pair towards “Support 1” and “Support 2” area. Fed speak will also be in focus, continued pushback on the market pricing in interest rate cuts this year should also support USD.
GBP continues uptrend
“Support 1” remained intact attracting buyers of GBP, which propelled the currency through April’s highs. There continues to be a lack of conviction for USD buying despite some better-than-expected core PCE inflation numbers last week, with the UK continuing to perform better than expected we could well see the May 2022 highs come into play (“Resistance 1”).
US data is on tap this week with another set of PMI releases, but focus will be on Wednesday’s Fed meeting, followed by job numbers on Friday.
Markets are currently pricing in one final hike by the Fed of 0.25%, followed by a pause and then the prospect of a rate cut at the end of the year. As ever, the accompanying rate statement will be key for the Fed to either concede to the markets’ expectations of future rate cuts or continue their protests claiming that an extended pause in their hike cycle is more than likely. Job numbers will also be key to give a gauge of how the economy is performing.
Upside momentum failing?
Indecision on GBPUSD remains, with the pair continuing to trade between “Resistance 1” and “Support 1”. GBP failed to follow through higher, despite data supporting the idea of more rate hikes to come from the BoE (Bank of England) this year, also suggesting lack of conviction in the markets.
The USD drew support from Fed speak, discounting the idea of rate cuts later in the year by the Fed (Federal Reserve).
The bulk of any moves will likely be based on news from the US this week, with the only notable piece of data from the UK being the Right house price index. Higher interest rates seem likely to reduce demand and could have a negative impact on house prices.
No Fed speak this week, as we enter the blackout period before next week’s rate decision. This week, key US data points will be the GDP figures for Q1, followed by the employment cost index and the core PCE inflation numbers. Higher numbers on these data points will likely cement a 0.25% hike in May, as well as reducing rate cut expectations later this year, which ultimately suggests US strength.
Upside momentum failing?
Last week, GBP was seen breaking to fresh 10 month highs versus USD, on the back of weaker US inflation numbers. However, on Friday, a sharp reversal of the weekly move was seen, with GBPUSD moving closer and lower on the week, signalling indecision as markets reduce year-end Fed (Federal Reserve) rate-cut expectations.
Breaches of “Resistance 1” and “Support 2” levels will be key this week.
At the end of the week, US PMIs will give a measure of how the US economy performed in April, but focus this week will be mainly on Fedspeak. The May 0.25% rate hike by the Fed is largely priced and market focus will be on year-end rate hike/ cut expectations. A reduction of rate-cut expectations should see the USD gain.
However, the main focus on the GBPUSD pair this week will come from the UK with jobs, inflation, retail sales, and PMI data. Currently, markets are pricing in a 0.25% hike by the BoE (Bank of England) in May, however, recent comments from the BoE have suggested a pause in hikes. Should the data points disappoint, then the chances of a 0.25% hike in May will reduce, which would be negative for GBP. Should a higher print be experienced, the March uptrend could be seen to continue.
GBPUSD downtrend to begin?
Last week, we saw GBP break to fresh 10-month highs versus USD, however prices failed to remain above “Resistance 1”, signalling a lack of momentum for the current March uptrend to continue.
Friday’s job numbers heightened the chance of a 0.25% hike in May, causing the uptrend to break, signalling a move lower. A breach of “Support 1” would indicate and suggest an expected further drop.
In the US, focus will be on March’s core consumer inflation and producer inflation numbers, as well as retail sales. Should the data point provide further ammunition for a 0.25% hike in May, then we could well see further demand for USD. Additionally, several Fed (Federal Reserve) members are expected to speak throughout the week.
This week, UK data in the form of February’s GDP, industrial, and manufacturing production figures is expected to be released on Thursday, with BoE members Bailey, Tenreyro, and Pill all set to speak this week as well.
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