GBP/USD Forecast: Pound in peril ahead of Powell and UK GDP

• GBP/USD has dropped to the lowest since January in response to poor UK data, upbeat US NFP.
• UK GDP is set to raise recession fears while the Fed's Powell may play the main role.
• The daily chart for the second week of July is pointing to further falls.
• Experts are bullish on GBP/USD on all timeframes.

What just happened: Fears of a UK recession are growing

Forward-looking indicators have indicated a bleak future. All three Markit/CIPS's Purchasing Managers' Indices (PMIs) have fallen below expectations. According to the surveys, the manufacturing and construction sectors are already contracting while the services sector – the UK's largest – is stagnating. Fears of a recession are rising.

Mark Carney, Governor of the Bank of England, has also pushed the pound lower. The Canadian central banker has said that the BOE will assess the "sea change" in the global economy in its August meeting – opening the door to abandoning the hawkish stance. Carney focused on trade tensions but also reiterated that markets are forecasting a hard Brexit – contrary to the bank's expectations for a smooth one.

The Conservative Party's leadership contest continues in full swing. Former foreign secretary Boris Johnson has repeated his pledge to leave the EU by the October 31st deadline. Jeremy Hunt – his successor at the foreign office – has angered businesses by saying that companies that go bankrupt due to Brexit "will understand the sacrifice."

US President Donald Trump and his Chinese counterpart Xi Jinping have agreed to resume trade talks and hold their fire on new tariffs. The trade truce temporarily inspired markets befoe markets realized that the gaps between remain wide and the thrill was replaced with fresh concern. 

US data has been mixed. Both ISM Non-Manufacturing PMI and factory orders dropped below expectations and the ADP private sector jobs report also fell short of estimates. However, the US dollar has ended the week with a bang – the US gained 224K jobs in June – far above expectations. The publication has sent GBP/USD to the lowest levels since January.

See NFP Quick Analysis: Time for USD bulls to enjoy the fireworks – the Fed's cut may be a one-off

UK events: GDP and the Tories in focus

The Tory contest continues in full swing until the result is published on July 23rd. Comments from the candidates – and especially from Johnson – may move the pound. If the former London mayor reiterates his uncompromising stance to leave the EU by October 31st, Sterling may suffer. If he opens the door to changes, the pound has room to recover. 

The main event on the economic calendar is Gross Domestic Product (GDP) for May, due on Wednesday. Monthly GDP figures tend to have a muted effect on the pound – but this time may be different. The recent worrying PMIs have joined the disappointing GDP figure for April – the economy contracted by 0.4%. The output downfall was in April was seen as a natural response to the strong growth seen in March – growth that was due to stockpiling. The UK was set to leave the EU on March 29th, and businesses were preparing for it.

In May, the economy was already further away from the distortions caused by Brexit plans. Economists now expect a return to growth in May – 0.3%. The economy is expected to expand at a modest pace in the second quarter but if it shrinks for a second consecutive month, fears of a recession will likely increase. 

The accompanying release of manufacturing output will also be watched. A weaker pound may have given a boost to exports, yet even here, estimates stand at a squeeze. 

The Bank of England's Silvana Tenreyro will speak later that day and may respond to the data.

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

US events: All about the Fed

The Federal Reserve has no less than four opportunities to shake markets this week – and three of these belong to Fed Chair Jerome Powell. He is due to deliver a speech in Boston on Tuesday and will testify on Capitol Hill on Wednesday and Thursday. His prepared remarks for his testimony, due on Wednesday will likely carry the heaviest weight on markets. The Federal Open Markets Committee (FOMC) publishes its meeting minutes on Wednesday, promising explosive price action. 

The central bank is set to cut interest rates in its upcoming meeting. Will they settle for a one-off reduction of 25 basis points? Or will they slash rates by 50bp in July and embark on a long cycle of monetary stimulus? Markets are scratching their collective heads – and Powell may provide some answers. 

The Fed Chair will lay out the Washington-based institution's views on employment – responding to the latest employment report – as well as inflation, growth, and trade concerns. While he may be reluctant to answer political questions, Powell is known to prefer lower tariffs over higher ones.

A critical indicator for the Fed is due on Thursday – Consumer Price Index (CPI) for June. Core inflation has dropped to 2.0% year on year in May, and another slide may weigh on the dollar.

The US and China are due to hold a telephone call that will mark the beginning of the new round of talks. No breakthrough is likely.

Here are the scheduled events in the US:

GBP/USD Technical Analysis 

GBP/USD has been suffering from downside momentum on the daily chart and continues trading below the 50, 100, and 200-day Simple Moving Averages. The Relative Strength Index (RSI) is leaning lower – yet without entering oversold conditions.

June's low of 1.2505 is critical support. The post-NFP break has yet to be confirmed. It is followed by mid-December's low of 1.2475, and by the 2019 trough of 1.2445. Further down, we are back to lines that were last witnessed in 2017. These include 1.2360 and 1.2250.

May's low of 1.2558 is a battle line on the way up. It is followed by 1.2605 which has both capped cable's recovery attempt in early July and also provided support in May. Next, we find 1.2660, which provided support in late June, followed by 1.2765, which was double-top that month as well. 1.2815, and 1.2870 follow.

GBP/USD Sentiment

GBP/USD may extend its falls amid Brexit, trade, and recession fears. However, Powell may provide some solace with a dovish message, smoothing the slide.

The FXStreet Poll shows that experts remain bullish on GBP/USD on all timeframes. The recent lows may be unsustainable. Nevertheless, it is important to note that the average targets have been downgraded, especially for the short term.

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