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Downtrend intact, but retracement due
A dismal week for GBP following lower inflation numbers, BoE (Bank of England) holding rates and lower economic activity in September.
USD was supported with the Fed raising their economic growth projections and 2024 interest rates projection to support their higher-for-longer mantra. So, for now most of the weakness on the GBPUSD pair is now priced in, which caused a lot of USD selling and GBP buying.
The next likely move could see a short-term retracement for markets to reposition, buying USD again, and hedge against any further falls. We eye up a move higher to our 1st target in the short term before the longer downtrend continues.
Very little to come out from the UK this week, with only the final readings of economic growth for Q2 to be released, so little volatility expected from this data point. GBP will likely take cues from general risk appetite in market.
Fed (Federal Reserve) officials will be speaking throughout the week, following on from last week’s Fed meeting to justify when they expect to raise interest rates next. We have final readings of US GDP for Q2 as well, with a minor upgrade expected. Friday’s income and spending report for August as well as the Core PCE inflation number will be key for USD on data side.
The fundamental backdrop suggests that the downtrend for the GBPUSD pair should continue in the longer term. However, on a technical basis, the two-month move lower does look overdone, with GBP looking oversold and USD overbought. Thus we expect a correction higher towards our first target a per the graph above.
GBPUSD in downtrend channel
The GBPUSD is firmly in a downtrend with markets favouring USD on growth rate differentials, risk aversion, as well as the allure of a 5% yield.
After US retail sales came in stronger than anticipated on Thursday, markets broke through the 200 day moving average, a key technical support where we would have expected GBP buys to keep the uptrend intact. A move through here suggests further weakness on the GBPUSD pair, with the lows in May now eyed.
Wednesday’s Fed (Federal Reserve) meeting is not expected to produce any fireworks, with markets not pricing in any rate hikes, but we’ll be paying attention to the accompanying rate statement and whether the Fed keeps the door open for further rate hikes in the future.
With the BoE (Bank of England) meeting on Thursday, we could well see the last 0.25% hike by the Bank or a pause with suggestions of a final hike in November. Either way the net result is that one more hike is penned in. More importantly for GBP, will be how the markets price in rate cuts in 2024, larger or earlier rate cuts will add to further gloom for the currency.
In light of focusing on growth differentials, on Friday we have September’s PMI activity numbers. The US is currently leading the race in activity versus the UK and Europe, and should their activity remain ahead then we expect further demand for USD to follow.
Short of any big surprises, we would expect the May low on the pair to be tested, which we set as a target for USD sellers.
Rangebound on the week
Last Monday, GBPUSD tested “Support 1” ahead of the wage and inflation numbers from the UK, but the higher wage numbers from the UK increased demand for GBP taking the pair close to “Resistance 1”. Demand for USD was consistent throughout the week also with the pair ultimately finishing flat on the week.
We get our first taste of economic activity in August with the release of services and manufacturing PMIs.
The US dollar continues to be supported on the resilient economy narrative, as well as thoughts that interest rates will stay higher for longer. Both will be affected by August’s PMI numbers as well as Powell’s speech at the Jackson Hole Symposium on Friday.
Overall, there seems to be growing demand for USD now. GBP had been supported by last week's wage and inflation numbers, however, ultimately with focus falling on the strength of respective economies, it does seem that the data points to a stronger US economy versus the UK and therefore we could well see another attempt at “Support 1” levels.
Retracement done, downside to continue?
The GBPUSD pair retraced higher before finding resistance off the March uptrend, which was former support. This was roughly near the “Resistance 1” area which kept gains on GBP limited. USD continues to be supported on risk aversion and growth prospects rather than rate expectations.
This week for the UK, there will be plenty of data for the markets to sink their teeth into. On Tuesday, wage data is expected to show that average earnings rose by 7.4% in the three months leading up to July, which could add to further gains for GBP. However, a drop of inflation numbers on Wednesday could cause markets to ease interest rate expectations, likely adding pressure onto GBP. UK retail sales will close the week off on Friday.
The US dollar has started the week higher on risk aversion, following more data illustrating the current problems with China’s property market. On the data side, US retail sales on Tuesday should be boosted by Amazon Prime Day, higher gasoline prices, and an increase in car sales, will likely illustrate the resilience of the economy. FOMC minutes will also be released on Wednesday evening.
Overall, there seems to be increased demand for USD in the markets, so long as “Resistance 1” remains intact then we’re likely to see a move to “Support 1”.
Retracement seems likely
GBPUSD continued its decline heading into the BoE (Bank of England) meeting, causing the March uptrend to be breached. Given the meeting was perceived as less dovish than expected, we saw GBP retrace losses going into the end of the week with markets booking profits on the weekly lower move.
This week for the UK, the only thing to note will be the second quarter growth numbers on Friday. Markets are expecting the economy to have registered no growth when compared to the first quarter of this year. For perspective, US GDP for the same period is at 2.4%.
The highlight for the week will be US inflation numbers on Thursday. Headline inflation is expected to rise to 3.3%, with the core number expected to remain at 4.8%. Anything to suggest that inflation is proving sticky may well increase bets of a rate hike in September and add to demand for USD.
Following the breach of the march uptrend, markets seem to be taking a breather in pushing the GBPUSD pair lower, based on its current position. Likelihood is that markets will be looking for a better position before any further falls, so we could well see a move towards “Resistance 1” before a test of “Support 1”.
Supports to be tested
Demand for USD picked up substantially (highlighted by the large red candle) on Thursday following the higher-than-expected GDP numbers from the US. The data now raises the prospects of the US avoiding a recession.
Thursday’s BoE (Bank of England) meeting will be the highlight for the UK and will likely give markets a gauge of whether we’re at the start of a bout of GBP weakness. Markets are now 50/50 over a 0.50% interest rate hike, following recent data and we’ll look to see what the bank suggests about future rate hikes as week. A switch to data dependency will likely lead to lower pricing on additional interest rate hikes this year and weaken GBP. We will also have a final reading of July’s PMI numbers.
For the US this week it’s all about the job numbers and whether the data continues to support the resilient US economy narrative, therefore continuing to support USD gains. JOLTS job openings will be out on Tuesday, ADP payrolls and nonfarm payrolls on Wednesday, and unemployment rate and average hourly earnings out on Friday. PMI numbers will also be released and we’ll continue to monitor earnings amongst US corporations to gauge risk appetite.
Like last week, so long as the narrative of a resilient US economy remains supported and we see a dovish interpretation of the BoE meeting, then it seems likely we’ll see a test of the GBPUSD September uptrend and then see a test of “Support 1”.
Supports to be tested
The lower-than-expected inflation numbers from the UK shook sterling markets, causing peak interest rate expectations to be scaled back. COmbine that with demand for the US dollar increasing on lower risk appetite in markets and expectations that the BoJ (Bank of Japan) will sit tight on amending monetary policy, and price action took GBPUSD off recent highs with the worst weekly performance since February.
UK PMI numbers released this morning are the only major data point for the pound. The numbers revealed that economic activity fell even more than expected and backs recent concerns over the UK economy.
The Fed (Federal Reserve) meeting this Wednesday will be key. It’s largely expected that the Fed will hike by 0.25% and will hint that another hike could be on the cards, subject to incoming data. We’ll also be listening out for additional hawkish tones in the form of pushing back on the possibility of interest rate cuts in 2024 and sticking to their mantra of holding rates higher for longer.
US PMIs, Q2 GDP numbers, and core PCE inflation numbers will be in focus. Second quarter earnings from the likes of Microsoft, Google, and Meta will be out this week to give a gauge of risk appetite in the markets.
Overall, the GBPUSD uptrend since September 2022 remains in play for now, but with markets narrowing UK-US interest rate differentials and a possible shift in risk appetite, it begs the question for how long? It seems more likely that we’ll see a test of “Support 1” and the rising trend line, rather than see GBPUSD test the recent highs again.
Uptrend still intact as GBP carves out new highs
Last week, GBP was well supported by the higher-than-expected wage numbers as well as GDP coming in marginally better than expected. This combined with the narrative surrounding US disinflation and seeing equity markets continue to make new highs, it was no surprise to see the GBPUSD rally continue. Current levels present a 15-month high.
This week, the big event on the GBPEUR pair will be the Uk inflation numbers. Whilst headline inflation is expected to drop to 8.2%, it will be the core inflation number that will be the key measure of whether the BoE (bank of England) will hike interest rates by 0.50% or not in August.
With the markets still pricing in 1.22% worth of additional hikes by the BoE, the bar is set high and anything to suggest that inflation is dropping will likely cause GBP to weaken, dropping down to the “Support 1” level. The latest retail sales report is also expected to be released on Friday.
It’s set to be a quiet week on the US front, with no Fed speak expected ahead of next week’s interest rate decision and the only notable data point will be June’s retail sales numbers to give a gauge of how the economy is doing.
Downtrend was short-lived, longer-term uptrend still intact
Last week, we had very erratic price action when volatility eventually picked up and what looked like a continuation of a downtrend was undone with the lower-than-expected nonfarm payroll numbers, causing USD to be sold aggressively on Friday.
This data point outshone data from the previous day, suggesting that the US economy remained strong. In general, GBP outperformed with markets increasing the terminal interest rates from 6.25% to 6.5%.
This week, UK job numbers will be in focus providing insight to whether wages will continue to climb higher, add further inflationary pressures, and support the markets pricing of seeing another 0.50% rate hike in August.
GDP numbers for May are also due for release on Thursday. Recent suggestions of seeing higher terminal interest rates have made markets cautious on the negative implications this could have on economic growth. If growth is already subsiding or contracting, then GBP could come under pressure.
US inflation numbers on Wednesday will be key for price action on USD. On Friday, USD weakened substantially following payroll numbers, falling short but worth noting that with wages climbing higher. There is evidence to suggest inflationary pressure may well persist. Evidence to support the Fed (Federal Reserve) needing to hike interest rates an additional two times or more, could see USD supported.
Start of downtrend?
This week June’s uptrend broke, with the market starting to believe the Fed’s (Federal Reserve) hawkish narrative, narrowing the interest rate differentials between the UK and the US.
For the downtrend to continue, we’ll need to see further demand for USD between the upper band of this downtrend change or even near the “Resistance 1” area. A push through “Support 1” opens the prospect of hitting “Support 2”.
Data points from the UK will come from the Services and Manufacturing PMIs, giving a gauge of how the economy is performing. A slowing economy in a backdrop of high inflation and interest rates could spell trouble for GBP.
A busy week from the US is expected, with key focus on the resilience of the US economy. Both Services and Manufacturing PMIs are due for release along with the monthly payroll numbers. Wednesday evening’s minutes from the latest Fed meeting will be key to gauge the hawks amongst the Fed.
Overall, moves on the GBPUSD pair will largely be drawn from US data points this week. Anything to suggest that the US economy is performing strongly should add to demand for USD, continuing the GBPUSD downtrend.
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