GBP/USD Weekly Forecast: Sterling stuck to stuff support zone of 1.3460-1.3500, flexing muscle for leaping off 2018 lows

 

• Sterling is facing a strong support zone around 1.3460-1.3500 representing 50% Fibonacci retracement of a post-Brexit slump from 1.5030 to 1.1940.
• The mix of macro releases scheduled for the week ahead is supporting the view of Sterling leaping off 2018 lows.
• Rising US benchmark Treasury yields over the 3.10% support the US Dollar across the board.

GBP/USD was trading down 0.4% at around 1.3460 against the US Dollar on Friday afternoon falling to the lowest level in 2018. The currency pair is stuck to strong support zone of 1.3460-1.3500 represented by 50% Fibonacci retracement of a great post-Brexit fallout from 1.5035 to 1.1940 in 2016.

On the macro data front, the third week of May saw the UK labor market report coming out largely in line with expectations while Sterling was under pressure from the US benchmark Treasury yields rising massively to reach the 7-year high of 3.13% on Friday. Rising Treasury yields supported the US Dollar on all fronts with both the Euro and Sterling falling to fresh 2018 lows while Japanese Yen fell to 16-weeks low.

The political uncertainty also played a partial role in Sterling’s shaky performance against the US Dollar last week as the media reports suggested that the UK government would lean towards the idea of keeping Britain in the customs union with EU even after Brexit transition period expires in December 2020, while the UK government officially opposes such scenario. 

The fourth week of May is scheduled to deliver important data in the UK including inflation, retail sales, and GDP data while the Bank of England Governor Mark Carney will deliver his dovish message about the fragile outlook for the UK economy that keeps the interest rates close to all-time low delivered  by May Inflation Report as he will testify in British parliament. The UK retail sales are expected to fall 0.1% over the month in April following the unexpectedly strong deceleration in March, but the core retail sales stripped of auto fuels sales are seen rising strong 1.3% m/m. The upward revision is also expected for the first quarter GDP from a preliminary reading of +0.1% Q/Q to 0.2% Q/Q while accelerating from 1.2% y/y to 1.3% y/y.

The macro news should provide a positive picture of the UK economy with inflation decelerating in April to 2.3% y/y, the core retail sales rising 1.3% m/m, more than erasing the -0.5% monthly fall in March and the first quarter GDP revised upwards confirming the Bank of England’s view of first quarter adverse weather-related blip. 
Technically, the GBP/USD is on the downside with the Momentum indicator leaping off post-Brexit lows recently and pointing upwards. The Relative Strength Index, and Slow Stochastics all flat on the daily chart ready to correct higher from oversold territory.

Technical analysis

GBP/USD daily chart

With GBP/USD correcting from a 22-month high of 1.4377 on April 17 to 1.3450, the lowest level during the third week of May, the currency pair has broken both 100-day and 200-day moving averages and it also broke below the key support trendline. The GBP/USD is now facing strong support zone at 1.346-1.3500 represented by 50% Fibonacci retracement line of the post-Brexit slump from 1.5030 to 1.1940. The technical oscillators look exhausted with the Momentum falling to the lowest level since October 2016 and the Relative Strength Index crawling just above the oversold territory. The Slow Stochastic oscillator is deeply in the oversold territory since April 23 this year. Although technical oscillators are lagging, not leading indicators, the GBP/USD still needs a corrective price action higher for a respite before building further downward potential. While the GBP/USD is trading below 1.3850 area representing the confluence area of resistance of 100-day moving average and the 61.2% Fibonacci retracement of the previous upmove, the bearish trend is expected to prevail targeting lower levels around 1.3380 representing December 2017 low and 61.8% Fibonacci retracement of the uptrend from 1.2770 to 1.4377.

GBP/USD 1-hour chart

GBP/USD is looking pretty neutral on the 1-hour chart with technical oscillators like Momentum and the Relative Strength Index pointing downwards somewhere in the middle of its usual ranges. The Slow Stochastics is in the oversold territory getting ready for a rebound upwards.

Macro data next week

The set of the UK macro data scheduled for the fourth week of May is strong kicking off with the Inflation Report hearing in the UK parliament. The hearing itself is a lengthy, rather boring event of parliamentarians asking questions and trying to grill the Bank of England Governor Mark Carney accompanied by Deputy Governor. The message from the parliamentary hearing should though be unchanged from the message of the May Inflation Report itself that the rates are expected to remain unchanged in the UK because of risk to the economic and inflation outlook prevailing even as the Bank of England considers the recent unexpectedly strong deceleration in the UK economy a weather-related temporary blip.

The UK economic calendar for May 21-25

As far as the macroeconomic data are concerned, the trio of the relevant data are set to confirm the Bank of England’s view, should actual data confirm the market expectations.

The UK inflation is expected to decelerate further to 2.3% y/y in April compared to 2.5% y/y in the previous month while the core inflation stripping the consumer basket off food and energy prices is set to rise 2.3% y/y as well, unchanged from the prior month.

The UK retail sales are seen falling modestly on the headline level falling -0.1% m/m in April, but the core retail sales are seen rising strongly by 1.3% m/m after falling -0.5% m/m in March. The second reading of the first quarter GDP is also expected to deliver an upward revision to the preliminary reading of 0.1% Q/Q increase with the UK GDP rising 1.3% over the year instead of preliminary reading of 1.2% y/y increase.

The US economic calendar for May 21-25

On the other side of the Atlantic, the FOMC meeting minutes headline together with the Federal Reserve Bank chairman Jerome Powell speech on the conference about the future of the central banking in Stockholm in Sweden on Friday next week. 

From the data set, the weekly jobless claims and Friday's durable good orders headline the agenda complemented by numerous speeches of Fed officials.

Forecast for the next week

While the FXStreet Forecast Poll expected the GBP/USD to end this week at 1.3560 at the actual spot price of GBP/USD at the time of completing this report was 1.3470. Compared to last week when the FXStreet Forecast Poll was almost 100% sharp with the prediction of the spot price for one week ahead, this means a slight deterioration. Of course, the deterioration was caused by external factors that were not taken into account at the time of publishing the report like the unexpectedly strong rise of the US benchmark Treasury yields that supported the US Dollar across the board. I expected the spot rate to end at 1.3650 during the week preferring the corrective move on GBP/USD higher. I also fancy the corrective move for the next week with the reasons pretty much unchanged. I expect GBP/USD to correct towards 1.3650 again as I back the UK fundamentals and I see the driven towards lower levels exhausted even with the US Treasury yields rising 0.16% on 10-year benchmark during the last week only.

For the next week, the FXStreet Forecast Poll expects the sideways trend to prevail with the median forecast of 1.3477 by the end of next week, almost unchanged from the spot price of GBP/USD at the time of publishing this report.  As the GBP/USD fell almost 900 pips lower during the last four weeks, the majority of bearish forecasts is diminishing with forecasters being evenly distributed by thirds among Bullish, Bearish and Neutral trend forecasters for next week.

As long as longer-term forecasts are concerned, the FXStreet Forecast Poll expects GBP/USD to reach 1.3543 level in 1-month time now, down from 1.3609 forecast expected last week. In three months time from now, FXStreet Forecast Polls sees GBP/USD at 1.3717, down from 1.3743 expected last week. 

FXStreet Forecast Poll