GBP/USD Forecast: Only strong UK GDP can save Sterling from Turkey’s induced fear

  • The GBP/USD is at fresh 1-year low trading below 1.2800 as fear of Turkey’s economy collapsing spurring massive risk-off.
  • The UK Q2 GDP is expected to rise 0.4% Q/Q, double the rate seen in Q1.
  • The UK manufacturing output is expected to increase 0.3% m/m in June while rising 1.0% over the year.

Sterling is trading down 0.7% at around mid 1.2700s against the US Dollar at the lowest level since June 26 last year after Turkey’s economic dive spurred massive Turkish lira selloff with contagion across asset resulting in a massive risk-off sentiment with safe havens like US Dollar benefitting.

The set of the UK economic data is due on Friday with the GDP report headlining. The second-quarter UK GDP is expected to increase by 0.4% Q/Q after rising 0.2% in the first quarter. That should see annual growth rate at 1.3% y/y.

At the same time, UK manufacturing output and the index of industrial production are due with the manufacturing output seen expanding 0.3% over the month while increasing 1.0% over the year in June.

While the risk-off sentiment is ruling the market the US Dollar is well supported, but the combination of risk-off factor receding and the UK macro data in line with the market expectations or beating the expectations should see Sterling stabilize back above 1.2800 level.

Technically the GBP/USD is trading at the lower boundary of the downward sloping trend channel and after the days of sell-off, it is ready for a correction. The technical oscillators including the Relative Strength Index and Slow Stochastics are deeply in the oversold territory with Slow Stochastics already making a bullish crossover indicating readiness to jump higher. While the combination of Brexit-related uncertainties and the monetary policy outlook differential keeps Sterling under pressure against the US Dollar, the improved growth picture should support it. Strong UK GDP should support Sterling with the directional movement towards 1.2800-1.2850 in near-term. On the flip side, the risk-off sentiment in combination with poor UK growth data open the way for 1.2750 before targeting 1.2700 and ultimately 1.2670.

GBP/USD 4-hour chart

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