- GBP/USD has been rising in response to the Fed opening the door to rate cuts.
- The focus returns to the pound with Conservative politics dominating.
- The daily chart for the second week of June remains bearish.
- The FX Poll shows a bullish bias on all time-frames with rising targets.
What just happened: GBP/USD rises on USD weakness
Price action on GBP/USD has mostly been a result of USD movements. Fed Chair Jerome Powell has opened the door to cutting interest rates by saying the bank will "act as appropriate" – instead of pledging patience on rates. His comments joined other dovish ones from his peers and weighed on the greenback.
Powell referred to low inflation and trade uncertainty as critical factors – and trade wars have intensified once again. President Donald Trump has said he will wait with new tariffs on China too after the G-20 summit later this month but remained adamant on slapping them on $300 billion worth of Chinese imports. Relations with Mexico remained tense as well.
US data has mostly disappointed. US ISM Manufacturing PMI fell below forecasts, and ADP jobs report for the private sector has shown an increase of only 27K jobs – the worst in over nine years. ISM Non-Manufacturing PMI was the bright spot.
The weak data preceding the Non-Farm Payrolls proved decisive. The US gained only 75K positions in May, far below 185K projected. Average hourly earnings rose by only 0.2% against 0.3% on a monthly basis. The NFP sent the greenback lower.
In the UK, the Conservative Party has set to the rules for the leadership contest, and these include minimal support of eight MPs for a candidate to be able to run. Tories have signaled they wish to conclude the process by July 22nd.
The leading candidates differ on exiting the UK. Former foreign secretary Boris Johnson has said that not leaving on time – by October 31st – would prompt the party's "extinction." Former Brexit secretary Dominic Raab wants to bypass parliament to facilitate a hard Brexit while only Michael Gove has opened the door to extending Article 50 – and that may lose him points among the membership.
UK data has been mixed. While the manufacturing and construction purchasing managers' indexes have shown contraction in their respective sectors, the services sector is still growing according to the forward-looking indicators.
UK events: Conservative Contest kicks off
After the main contenders have presented their arguments, their peers in parliament will have their say. MPs of the ruling party begin a process in which they will eliminate members who receive the fewest number of votes before the membership chooses between the last two.
The initial vote results may already provide a better picture of the top candidates. If Dominic Raab or other hard-Brexiteers receive many votes, the pound has room to fall. If Michael Gove, Jeremy Hunt or similar softer-minded candidates emerge with broad support, Sterling may shine.
At the time of writing, Boris Johnson – that quit the government in protest of a softer stance on the UK's EU exit – remains the favorite. Despite his credentials as a hard-Brexiteer, he may abandon the tough position once he reaches Downing Street.
The economic calendar features monthly Gross Domestic Product data for April – the first peek into the second quarter. Some of the economy's growth in the first quarter has been attributed to stockpiling ahead of the initial Brexit date of March 29th – at the very end fo the quarter. Some economists expect a downturn in the second quarter.
The figure is published alongside manufacturing production, which is projected to rise at a moderate pace.
The second significant release awaits pound traders on Tuesday with the employment report. The unemployment rate has surprised with a drop to a historic low of 3.8% in March. On the other hand, wage growth slowed down to 3.2% year on year. Both figures are forecast to reverse – the jobless to rise to 3.9% and wage growth to accelerate to 3.4%.
The claimant count change number for May will also be watched. Jobless claims have risen by 24.7K in April, adding to gains seen in previous months. The rise has not translated to an increase in the unemployment rate – at least not yet.
Here are the events lined up in the UK on the forex calendar:
US events: Watching trade tensions and the consumer
US Treasury Secretary Steven Mnuchin meets China's central bank governor Yi Gang at the G20 meeting of finance ministers and central bankers in Japan over the weekend – the first high-level meeting between the world's largest economies in a month. Markets will watch the headlines coming out from the encounter as well as tweets from Trump and other developments.
If the US moves forward with imposing tariffs on Mexico or perhaps on China – the greenback may advance on safe-haven flows.
The economic calendar features several top-tier releases. Markets expect the core consumer price index (Core CPI) to remain at 2.1% year on year. If it drops to lower ground, the chances of the Fed cutting rates may rise – the central bank meets in the following week.
Consumption is critical to the US economy and Friday's retail sales report for May will shed light on this sector. Back in April, headline sales have dropped by 0.2% and the control group – also known as "core of the core" – remained flat. Better numbers are on the cards in the upcoming report.
The University of Michigan's consumer sentiment index for June – which is the last significant release of the week – may go the other direction with a fall below 100.
Here are the scheduled events in the US:
GBP/USD Technical Analysis
GBP/USD has exited oversold conditions – the Relative Strength Index on the daily chart has risen from below 30. However, momentum is leaning to the downside and the pair continues trading below the 50, 100, and 200 Simple Moving Averages.
Support awaits at 1.2670 which was a swing low in early June. It is followed by 1.2605 which held the pair in late May before it dropped to 1.2558 – a four-month low. Further down, 1.2475 and 1.2445 date back to January.
Resistance awaits at 1.2750. The area served as resistance three times in recent weeks. It is followed by 1.2815 which was a swing high in MAy, and then 1.2870 that was the low point in April. Further up, 1.2915 and 1.2960 await the pair.
While we may get some clarity about the new leader of the UK – it may not necessarily be goods news. Moreover, a slowing British economy and Trump's trade wars may GBP/USD lower as well.
The FXStreet Poll shows that experts are bullish on all timeframes with higher targets. The short-term target has been upgraded and the long-term target has been downgraded. All in all, the objectives are closer to each other in comparison to the previous week.
- USD/JPY Forecast: Eyeing the US consumer after Powell's patience reaches its limits and bears take control
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