GBP/USD Forecast: Brexit talks and GDP set to break the balance

• GBP/USD has attempted a recover but was stopped by a resurging US dollar.
• The quarterly UK GDP report and US inflation data are the highlights of the week.
• The technical outlook is bearish for the currency pair. The forecast poll is mixed.

What just: Rising on Brexit hopes until the Fed came

The pound advanced on Brexit hopes and initial dollar weakness, but the rally stalled as Fed did not deliver the goods. 

Contrary to the colorful reports that Brexit talks were on the verge of collapse, both the ruling Conservative Party and the opposition Labour Party sounded cautiously optimistic on reaching an accord that could allow for an orderly Brexit. The British media suggested that PM Theresa May may be warming up to accepting a permanent customs union with the EU. 

The Bank of England left the interest rate unchanged and succeeded in striking a balance between confidence and caution. On the one hand, the BOE raised its growth forecasts and said that its path of rate hikes is higher than what markets priced in. Governor Mark Carney and his colleagues also sounded confident that a no-deal Brexit will be avoided.

On the other hand, the bank cut short-term inflation forecasts and highlighted the worrying slump in investment, which is turning out to be the worst in the post-war era. GBP/USD went up and down but eventually stabilized. 

Markit's forward-looking purchasing managers' indices did not offer any surprises either. Both manufacturing PMI and construction PMI met expectations.

The drama in cable came from the other side of the Atlantic. After GDP growth data contained a downbeat inflation gauge, the Fed's preferred measure of price development, the Core PCE, also fell short of expectations with 1.6%. The dollar's decline was exacerbated by the poor ISM Manufacturing PMI. 

The stage was set for the Fed to extend its dovish tilt and hint a rate cut was coming. However, Fed Chair Jerome Powell made a compelling case for staying put by stressing that the dip in inflation is transitory, the job market is booming, and growth. Powell's optimistic tour went extended abroad, and he noted the economic uptick in China and Europe and the higher chances of a US-Sino trade deal. 

Without an imminent rate cut, markets drove the greenback higher, and the cable rally was cut short.

The Fed's view was vindicated at the end of the week with a blockbuster increase of 263K jobs, significantly more than 185K that was forecast. Despite a miss on wages, the central bank has no urge to cut interest rates. 

See NFP Quick Analysis: The Fed was right, and the USD can continue climbing

UK events: GDP in focus

The upcoming week consists of fewer events but that does not necessarily imply fewer dramas. The most significant driver of Sterling remains Brexit. If PM May and opposition leader Corbyn clinch an agreement, the pound could soar. However, it may take more time, especially as both parties are torn between pro-Brexit and anti-Brexit factions. 

The European Elections are getting closer, and surveys are showing increasing support from Nigel Farage's newly minted Brexit party while both major parties are on struggling. Additional such polls may bring the leaders to an agreement that will allow the UK to leave ahead of the vote on May 23rd, thus canceling the elections.

The main data point of the week is on Friday when the UK publishes GDP growth numbers for the first quarter of the year. Economists expect a weak growth rate of 0.2% QoQ and 1.4%, YoY, a repeat of the numbers seen in the fourth quarter of 2018. Apart from the headline numbers, markets will examine the different components, with manufacturing production standing out in its importance. An increase in industrial output may compensate for low investment that the BOE warned against. 

Here are the events lined up in the UK on the forex calendar:

 

US events: Fed and the NFP

Talks are of importance also in the US. Some media outlets suggest the US and China may reach a long-awaited trade deal by the end of the week, on May 10th. Optimistic headlines about the negotiations have been the norm of late, and they are shrugged off. However, if the world's largest economies announce a summit between President Donald Trump and his Chinese counterpart Xi Jinping, that will already be a different story. Stocks could rally, and the safe-haven US Dollar may come under selling pressure. 

The Fed could continue influencing markets in the upcoming week. Patrick Harker and Raphael Bostic are scheduled to speak. Thursday's producer price index and jobless claims are of interest but will only serve as a warm-up towards the main dish.

Fed Chair Powell dismissed weak inflation as transitory, and his theory will come to a test on Friday. The core consumer price index is set to accelerate from 2% to 2.1% YoY in the release for April. Headline inflation is also set to advance from 1.9% to 2.1%. If the annual numbers do not surprise, the focus could quickly shift to the MoM numbers. In any case, the CPI release is the highlight of the week and is set to trigger volatility. 

Here are the scheduled events in the US:

GBP/USD Technical Analysis 

GBP/USD has now stabilized, and its technical indicators have become balanced. Downside Momentum has waned, and the Relative Strength Index is clinging to the middle point, around 50. 

Initial resistance awaits at 1.3100, a level that capped the price in early May and also where the 50-day Simple Moving Average meets the price. The next level to watch is 1.3130 which capped the currency pair in April. The following round number, 1.3200, also held GBP/USD down during last month. It is followed by 1.3270 which held it down in late March. The cycle high of 1.3388 is next.

1.3020 is a battleground where the pair that separated ranges in late April. The March low of 1.2960 is a critical level to watch as it also separated ranges of late and where the 100-day and 200-day indicators meet the price. The April low of 1.2870 is another considerable level. Further down, 1.2775 was the low point in February, and 1.2670 was a swing low in January. 

GBP/USD Sentiment

The next significant move in GBP/USD depends on cross-party talks. If they do not yield any headlines, GBP/USD has more room to the downside than to the upside as the US economy is outperforming the British one, and the BOE's hiking aspirations are fully Brexit-dependent. 

The FXStreet Poll shows a bearish bias in the short and medium terms and a bullish bias afterward. The target has been upgraded in the short term but downgraded in the long term. The targets are also closer to each other in comparison to previous weeks.

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