GBP/USD Weekly Forecast: Almighty US labor market set to support the King Dollar

  • The final first-quarter UK GDP rose above expectations on quarterly basis confirming the improved outlook for the UK economy. 
  • The Bank of England chief economist Andy Haldane voting in favor of a rate hike in June justified his hawkish twist by the economic indicators concerning the consumer sentiment rising back higher.
  • The “almighty” US June labor market report is expected to confirm the trinity of important indicators, rising wages, rising employment and the unemployment rate near cyclical lows.
  • After missing the forecast for a week ahead by some 90 pips last week, the FXStreet Forecast Poll turned less bullish with the Bullish vs. Bearish vs. Sideways predictions being evenly distributed for the week ahead. 
  • GBP/USD is set to be capped between 1.3100 and 1.3480 representing 50% and 38.2% Fibonacci retracement of the post-Brexit slump. 

GBP/USD is trading up 0.6% at around 1.3150 against the US after the UK GDP was revised upwards on last trading day of June to mark 0.2% Q/Q growth in the first-quarter while increasing 1.2% over the year. Earlier on Friday Sterling benefitted from the broad US Dollar weakness especially against the common European currency after the late-night summit of European leaders reached a late-night deal on migration that is a politically sensitive topic in Europe.

The same European summit is set to talk about a wide range of issues including the reform of the European Union and the Brexit negotiations. It is widely expected that the UK Prime Minister Theresa May will face a criticism from her European counterparts dissenting the pace of Brexit negotiations just nine months ahead of Britain finally exiting the EU.

The deal of the European summit on migration weakened the US Dollar temporarily and helped GBP/USD to jump above 1.3100 level where it fell on Thursday after the trade-related jitters roiled the markets helping the US Dollar to gain broadly against majors.  Breaking the 1.3100 important support area saw GBP/USD falling as low as 1.3050, the lowest level since November 3, 2017. 

On the macro front, there is no much support for Sterling in the week ahead, as only second-rank indicators are scheduled in the UK while the US is expected to see the almighty labor market report for June confirming the trinity of important indicators, rising wages, rising employment and the unemployment rate near cyclical lows. 

Technically, breaking  1.3100 level representing 38.2% Fibonacci retracement of a post-Brexit slump from 1.5020 to 1.1940 means that is sustained, GBP/USD will target lower levels continuously sliding towards 1.3030-1.3045 area representing swing lows from October and November last year. With technical oscillators pointing downwards, the test of lower levels is likely on a daily chart. Breaking below psychological 1.3000 level will open the way for 1.2770 representing another swing low and 1.2660 representing 23.6% Fibonacci retracement of the above mentioned post-Brexit slump.


The Bank of England policymakers speeches

During the June Monetary Policy Committee (MPC) meeting of the Bank of England, the Bank’s chief economist Andrew Haldane joined a group of the rate dissenters voting together with external members Ian McCafferty and Michael Saunders for a rate hike making the voting pattern 6-3.

MPC reasoned its hawkish twist by the outlook for the UK economy that is getting increasingly brighter with the slowdown from the first quarter this year considered just a weather-related blip.

”Number of indicators of household spending and sentiment has bounced back strongly from what appeared to be an erratic weakness in Q1, in part related to the adverse weather.  Employment growth has remained solid,” the Bank of England wrote in June monetary policy statement. 

The same reasoning was provided by the Andrew Haldane during his speech on productivity growth in the UK economy during the last week of June. Haldane justified his decision by the argument of the UK consumer data has virtually without exception bounced back since May Monetary Policy Committee meeting. Haldane also said that he does not expect a faster pace of interest rate increases than envisaged at the time of May Inflation Report.

During the last week of June also Ian McCafferty, the outgoing external MPC member was speaking about the necessity of communicating the importance of QE to the public that sees this instrument as not helpful. While McCafferty refrained from direct monetary policy comments in his farewell speech, Mr. Jonathan Haskel, who will replace McCafferty in September was cautious about the UK economy during his nomination speech in the UK parliament causing Sterling to fall to 1.3200 against the US Dollar at the beginning of the last week of June.

Technical analysis

GBP/USD daily chart

The daily chart saw GBP/USD not only testing the key resistance of 1.3100 representing 38.2% retracement of the post-Brexit slump from 1.5020 to 1.1940 but also temporarily breaking the level with the bottom of 1.3050 on Thursday, June 28. While Momentum is crawling on the downside around the zero neutral line, technical oscillators like Relative Strength Index leaped off the oversold territory and turned higher with GBP/USD correcting from 1.3050 towards 1.3170 at the end of the last week of June.  On the other hand, Slow Stochastics is about to make a bullish crossover within the oversold territory. The GDP/USD was unable to cross substantially below 1.3100 and with correction continuing it is likely to face 1.3200 and 1.3300 before testing key 1.3480 level representing 50% Fibonacci retracement level of the post-Brexit fall. The GBP/USD is still trapped in ranges formed by 38.2% and 50% Fibonacci retracement of the above-mentioned move at 1.3100 and 1.3480. The death star crossover of the 50-day and 100-day moving average on the daily chart indicates further downside potential for GBP/USD first attempting to break again 1.3100 represented by 50% Fibonacci retracement of the post-Brexit slump from 1.5020 to 1.1940. On the upside, the GBP/USD needs to break back above 1.3380 to target 1.3450, high from two weeks ago.

GBP/USD 1-hour chart

With the spot rate leaping up to 1.3170 from 1.3050 last week’s lows, the technical picture on GBP/USD on the 1-hour chart is also turning bullish, even as the currency pair remains framed within the downward sloping channel. The technical oscillators already turned higher with Slow Stochastics rising up towards the overbought territory and both Momentum and the Relative Strength Index rising higher. With break above 1.3200 GBP/USD is seen testing 1.3250 and the round big figure to test 38.2% Fibonacci level of 1.3100 as next hurdle. 

Economic fundamentals in the week ahead

The UK macro calendar includes mainly the forward-looking economic indicators surveying the activity in the manufacturing, construction and services sector in the UK with all surveys for all sectors expected to deteriorate in June.

While the UK purchasing managers index (PMI) in manufacturing is expected to decelerate to 53.4 in June after unexpectedly rising to 54.4 in May, the PMI in construction is set to decelerate to 52.0 and services activity PMI is expected to fall 53.0.

The calendar of the economic events for the first week of July is monotonously tilted to the negative side with the Bank of England Governor Newcastle speech scheduled for Thursday, July 5 unlikely to provide bullish incentives to the FX market. 

UK economic calendar for July 2-6

On the other side of the Atlantic, the first week of July is marked by most important macro release on the first Friday of the month with the US employment report due, but also the 4th of July, the Independence day with New York Stock Exchange closed and no macro data scheduled.  

The first week of July will open with the ISM in manufacturing that is scheduled for Monday and it is expected to decelerate to 78.2 in June, down from 79.5 in May. Within the manufacturing sector, the ISM prices paid also draw the market attention as a broader indicator of the inflation pressures in the US economy.

On Thursday, the calendar will deliver the weekly initial jobless claims, the private ADP employment report that is expected to see 180K new jobs added in the US economy in June as well as the FOMCminutes from the rate hiking June meeting.

The Friday is expected to see the employment report for June with 190K new jobs added in the US economy in June, wages rising by 2.7% y/y and the unemployment dwelling at 3.8%.

US economic calendar for July 2-6


Forecast for the next week

The FXStreet Forecast Poll for this week missed as the last week’s prediction stood at 13290 and the spot rate is at around 1.3200, while the intra-week low on GBP/USD was 1.3050.

While 61% of forecasters participating at the FXStreet Forecast Poll were bullish last week, the current forecast for the first week of July expects spot rate to fall to 1.3164 with bullish versus bearish and sideways predictions almost perfectly distributed in thirds.  

This compared to an overly bullish forecast last week with 69% of forecasters expecting the bullish trend in one week time compared to 65% of participants in the FXStreet Forecast Poll turning GBP/USD bearish two weeks ago. 

As long as longer-term forecasts are concerned, the FXStreet Forecast Poll turned bearish expecting 1.3237 in one month time from now compared to 1.3355 last week and 1.3263 in the one-month horizon two weeks ago. In three months time from now, FXStreet Forecast Poll sees GBP/USD at 1.3244, down from 1.3404 in three months time last week and down from 1.3508 forecast for 3-months from now predicted two weeks ago. 

FXStreet Forecast Poll

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