GBP/USD Forecast: Sellers encouraged as Pound Sterling stays below 1.2500
- GBP/USD fluctuates in a tight range below 1.2500 on Wednesday.
- Markets remain risk-averse ahead of the Fed policy announcements.
- ADP Employment Change and ISM Manufacturing PMI will be featured in the US economic calendar.
GBP/USD declined sharply on Tuesday and erased all of Monday's gains. The pair fluctuates in a tight range below 1.2500 as trading action remains subdued, with most major European markets staying closed in observance of the Labor Day holiday.
The renewed US Dollar (USD) strength caused GBP/USD to turn south in the American session on Tuesday. The Employment Cost Index rose 1.2% in the first quarter. This reading followed the 0.9% increase recorded in the previous quarter and surpassed the market expectation of 1%, reviving fears over strengthening wage inflation.
Early Wednesday, US stock index futures trade deep in negative territory, supporting the USD and not allowing GBP/USD to gather recovery momentum.
The US economic docket will feature ADP Employment Change and the ISM Manufacturing PMI for April. The market reaction to these data is likely to remain short-lived, with investors refraining from taking large positions ahead of the Federal Reserve's (Fed) monetary policy announcements. Nevertheless, disappointing data could make it difficult for the USD to build on Tuesday's rally.
The Fed is expected to maintain the policy rate at 5.25%-5.5% after April 30 - May 1 policy meeting. Investors will look for changes in the statement language and scrutinize Chairman Jerome Powell's comments for fresh insights into the possible timing of the policy pivot.
Markets are currently pricing a 94% probability that the Fed will leave the policy rate unchanged again in June. The probability of a rate cut in September stays slightly below 50%, according to CME FedWatch Tool. In case Powell adopts a concerning tone regarding the inflation outlook and causes markets to lean toward a rate cut toward the end of the year, the USD could continue to outperform its rivals and weigh on GBP/USD. On the other hand, the pair could stage a decisive rebound if Powell leaves the door open to a rate reduction in September.
GBP/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the 4-hour chart stays slightly below 50, while GBP/USD trades near the 100-period Simple Moving Average (SMA), currently located at around 1.2490.
In case GBP/USD stays below 1.2490-1.2500 resistance area, sellers could remain interested. In this scenario, 1.2450 (Fibonacci 23.6% retracement of the latest downtrend) and 1.2400 (static level, psychological level) could be set as next bearish targets.
On the upside, 1.2530 (Fibonacci 38.2% retracement) aligns as interim resistance ahead of 1.2560 (200-day SMA) and 1.2600 (Fibonacci 50% retracement).
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.
