GBP/USD Forecast: Sterling takes advantage of US politics, with domestic data on shaky grounds

Let me admit that this GBP/USD forecast for the fourth week of January is very conditional as the biggest risk event of the week is still being unresolved with the US politicians unable to reach a deal averting the US government shutdown that is set to come to effect beginning midnight January 19. At the time of writing of this report, no deal between the Democratic and Republican party in the US Senate was done although the House has already passed the short-term legislation enabling to prolong the period of government funding further. As a result, the GBP/USD was trading up 0.5% compared to the beginning of this week at around $1.3900.

GBP/USD daily chart

With the UK inflation and retail sales being the only important macro data due this week, the US Dollar negative market sentiment was carried over into the third week of January with GBP/USD appreciating more than 3.5% since Thursday, January 11. This is an important point to mention because with GBP/USD breaking new post-Brexit highs almost on a daily basis during the last 7 trading days, the move is US Dollar weakness determined. With GBP/USD appreciating this week, forecasters polled by FXStreet proved to be wrong on majority basis with the minority of 44% of the poll expected GBP/USD to strengthen last week.

The GBP/USD has easily taken over the resistance at $1.3850 representing 61.8% Fibonacci retracement line of post-Brexit slide lower and rose as high as $1.3940 with the text round big figure of $1.4000 being the next target on the upside for Sterling. With the immediate target on GBP/USD identified on the unprecedented basis at around big figure of $1.4000 and spot being less than 60 pips away from the target, real positioning might as well be somewhere even higher as no real resistance of a technical nature stands between current spot and $1.4050 level. That is particularly true for the case of the US failing to avert the US government shutdown.

The different story appears on the bearish side of the outlook for GBP/USD with former Fibonacci retracement line at $1.3850 turning support level now (a pretty weak one) and then $1.3700 next.

FXStreet confluence indicator on daily basis

Wages set to lag behind inflation as GDP remains subdued
Omitting the UK public sector finances due next week, there are two important pieces of macro data in the UK next week. First the UK labor market report and second the fourth quarter GDP data.

While the UK labor market is expected to deliver further slight improvement in terms of a number of people seeking unemployment benefits in December, the unemployment rate is set to dwell at a 4-decade low of 4.3% on an average basis for three months to December. The most wanted number in the whole labor market report will be the average earnings growth rate excluding bonuses that is expected to rise by 2.5% over the year in December, up from 2.3% a month ago. Should this be confirmed, it is still not enough to cover the 3.1% year-to-year rise in the consumer inflation. With the inflation rising faster than wages, the real, inflation-adjusted wages are negative adding the pressure of the UK consumers, especially with the UK GDP growth being dominantly shaped by household final consumption.

The second really important piece of macro data is scheduled for Friday next week, with a preliminary reading of the fourth quarter GDP due. The market has seen an above-expected slowdown in UK retail sales in December with the retail sales data pointing that the retailers adding almost nothing to the fourth quarter GDP growth. Should that prove right estimation, government spending, investment or the foreign trade balance are set to compensate in order to see the Q4 GDP rising 0.4% Q/Q and 1.5% over the year.

The UK economic calendar for the week of January 22-26

UK retail sales slumped in December
While the UK CPI  was reported on the brighter side having decelerated to 3.0% y/y in December compared to expectations of 3.2% y/y increase, the UK macro story of the third week of January definitely is the unexpectedly steep fall in the UK retail sales in December.

The UK retail sales reported a -1.5% monthly slump in December compared to -0.6% fall expected by markets. Core retail sales that are stripped of motor fuel sales fell 1.6% lower in December, double the expected 0.8% monthly fall.

At the same time, the total, as well as core retail sales, failed to meet the expectation of accelerating on a year-to-year basis.

Sales of household goods plunged 5.3% over the month in December while clothing sales fell 1%. Only department stores saw an improvement, with sales rising 0.6%. The retail sales rose only 0.4% for on the quarterly basis during the final three months of the year, halving the growth rate in the previous quarter with no contribution to GDP growth during final three months of last year.

GBP/USD where to go from here

Looking at the technical picture for the GBP/USD and especially reasons behind the current strength of Sterling leaves me betting on politics. And I know that this is a wrong horse to bet on. It can win streak of races before it totally collapsing in the most eagerly awaited one. In my view, the US government has a long history of prolonging, extending, amounting and raising the debt ceiling while extending the temporary financing for the US government, the US government shutdown scaremongering is set to end soon, should the deal be done now or within next few days.

Putting politics aside, the current market is readying itself for correction. This is what the technical picture is telling me. The GBP/USD rose 3.5% over the course of last 7 trading days and as both the Relative Strength Index and the bearish Slow Stochastics crossover in Overbought territory indicate, next move should be on the downside.

The bearish scenario is also supported by the expected development of the economic fundamentals, whereas both the UK wage growth and the UK GDP growth are put in risk of failing to meet market expectation weighing further on GBP/USD.

Should the bearish scenario materialize GBP/USD is likely to face minor support at $1.3850 before targeting $1.3700. On the upside $1.4000 is a mystical round target.  

FXStreet Forecast Poll also sees GBP/USD lower for the fourth week of January with an average of $1.3829 expected.

FXStreet Forecast Poll