GBP/USD Forecast: Pound Sterling could correct lower on risk aversion
- GBP/USD moves sideways slightly above 1.2750 early Wednesday.
- US stock index futures trade deep in negative territory.
- The near-term technical outlook points to a loss of bullish momentum.
GBP/USD continued to push higher during the European trading hours on Tuesday and climbed above 1.2800 for the first time in over two months. With the US Dollar (USD) benefiting from upbeat data in the American session, however, the pair erased its daily gains. Early Wednesday, GBP/USD moves sideways in a very narrow channel slightly above 1.2750.
US Dollar PRICE This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the Euro.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.10% | -0.18% | 0.08% | -0.06% | -0.37% | -0.37% | -0.15% | |
| EUR | -0.10% | -0.31% | 0.00% | -0.15% | -0.53% | -0.57% | -0.22% | |
| GBP | 0.18% | 0.31% | 0.24% | 0.13% | -0.22% | -0.18% | 0.06% | |
| JPY | -0.08% | 0.00% | -0.24% | -0.17% | -0.46% | -0.37% | -0.26% | |
| CAD | 0.06% | 0.15% | -0.13% | 0.17% | -0.34% | -0.31% | -0.15% | |
| AUD | 0.37% | 0.53% | 0.22% | 0.46% | 0.34% | 0.06% | 0.28% | |
| NZD | 0.37% | 0.57% | 0.18% | 0.37% | 0.31% | -0.06% | 0.20% | |
| CHF | 0.15% | 0.22% | -0.06% | 0.26% | 0.15% | -0.28% | -0.20% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
The Conference Board's Consumer Confidence Index improved to 102.00 in May from 97.5 in April, while the Expectations Index rose to 74.6 from 68.8. Assessing the US consumer sentiment survey's findings, "the strong labor market continued to bolster consumers’ overall assessment of the present situation," said Dana M. Peterson, Chief Economist at the Conference Board.
The benchmark 10-year US Treasury bond yield rose nearly 2% after this report and the USD Index closed the day marginally higher.
The US economic calendar will not offer any high-impact data releases. Later in the session, the Federal Reserve (Fed) will release its Beige Book.
Investors are likely to pay close attention to risk perception in the American trading hours. At the time of press, US stock index futures were down about 0.5% on the day. If Wall Street's main indexes open deep in the red and struggle to stage a rebound, the USD could capitalize on safe-haven flows and force GBP/USD to correct lower.
GBP/USD Technical Analysis
If GBP/USD falls below 1.2760-1.2750 (Fibonacci 78.6% retracement of the latest downtrend, mid-point of the ascending regression channel) and starts using that area as resistance, it could extend its slide toward 1.2700 (psychological level, static level) and 1.2675 (lower limit of the ascending channel).
On the upside, resistances are located at 1.2800 (psychological level, static level) and 1.2850 (upper limit of the ascending regression channel).
Meanwhile, the Relative Strength Index (RSI) indicator on the 4-hour chart edges lower toward 50 on Wednesday, highlighting a loss of bullish momentum.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
