GBP/USD Weekly Forecast: Brexit-related political mess set to ground Sterling further
- The US Dollar benefits from the interest rate hike of the FOMC this week with the outlook for gradual policy normalization remaining unchanged.
- The UK economy showed stagnant inflation and the unemployment rates in May while retail sales rose strongly.
- It was not the economics, but politics that has finally undermined Sterling with MPs mixing up across the political scene before key Brexit laws are approved.
- GBP/USD is set to be capped between 1.3100 and 1.3480 representing 50% and 38.2% Fibonacci retracement of the Brexit related slump to from 1.5020 to 1.1940.
Sterling is set to close the second week of June lower against the US Dollar after opening at 1.3410 on Monday falling over the last week as low as 1.3210 on Friday morning just to regain some traction on the end of the week profit-taking. While economic fundamentals were p[retty solid, it was the political uncertainty that finally saw the GBP/USD falling lower.
The second week of June saw the number of the UK unemployment benefit seekers dropping unexpectedly by -7.7K and the April increase of 31.3K was revised down to 28.2K, while the wage growth slightly missed the market expectations. The labor market news saw GBP/USD jumping from 1.3350 to 1.3420, with the 1.3420-1.3450 acting as a cap and a major resistance for Sterling last week.
The UK inflation remained unchanged in May while rising 2.4% over the year in May with core inflation rising 2.1% y/y. The inflation data were slightly lower than expected, especially the headline inflation growth rate, but the core inflation that sees the consumer basket stripped of the food and energy items remained stable at 2.1% y/y. With inflation stable and prospects for the Bank of England to hike rates dimmed, the GBP/USD approached 1.3300 level for the first time last week.
A decade of the UK inflation ending in May 2018
The US Federal Reserve bank hiked the rates overnight, but the dovish outlook saw the GBP/USD retreat towards 1.3400 level overnight and to reach last week’s high of 1.3448after the UK retail sales rose 1.3% over the month in May.
It was actually the politics that broke the neck of Sterling on Thursday as it has become obvious that the ultra-conservative approach to Brexit from the UK Prime Minister Theresa May is likely to be opposed strongly by parliament’s growing role in Brexit.
The talks between the UK and the EU are progressing very slowly given the fact that there are only 2-3 months left for any negotiations before the UK formally exits EU on March 2019. Some officials talked privately about the possibility of whether the UK might need to stay in the EU past March 2019 if Brexit negotiations don’t accelerate over the summer.
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With inflation knocking on the Fed doors, two more rate hikes are still in play after June
Technical analysis
GBP/USD daily chart
The daily chart sees GBP/USD falling again towards key resistance of 1.3100 representing 38.2% retracement of the post-Brexit slump from 1.5020 to 1.1940. Key technical oscillators are pointing in different directions on a daily chart. The Relative Strength Index leaped off the oversold territory and turned lower again with Sterling falling to last week’s lows of 1.3200. The end of the week correction towards 1.3270 sees the Relative Strength Index turning higher from within reach of the oversold territory. On the other hand, Slow Stochastics is still pointing downwards. The GDP/USD was unable to cross above 1.3480 representing 50% Fibonacci retracement level of the Brexit-related fall and it is turning lower. The GBP/USD is currently 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 1.3200 before attacking 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, last week’s high.
GBP/USD 1-hour chart
With the spot rate falling past 1.3300 level and correction from 1.3210 low to 1.3380, the technical picture on GBP/USD on the 1-hour chart is also turning bearish. The technical oscillators already turned higher with Slow Stochastics actually making a bearish crossover in the overbought territory that is a selling signal. The break below 1.3200 should open the way for GBP/USD to test 38.2% Fibonacci level of 1.3100 as next hurdle.
Economic fundamentals in the week ahead
The UK macro calendar is pretty empty for the with starting June 18 and ending June 22. All of the important economic indicators were published last week and with inflation stabilizing next inflation target of the Bank of England, there is not much to expect from the next week’s Monetary Policy Committee meeting.
It is a sure shot that the Bank of England will confirm that the Brexit uncertainty is still representing the biggest risk to the UK’s economic outlook and with exception of two external monetary policy members Ian McCafferty and Michael Sauders, there are no fresh policy hawks on the horizon.
UK economic calendar for June 18-22
On the other side of the Atlantic, the week after the FOMC hiked rates will see the whole plethora of Fed speakers talking on different forums, but the key idea is still fixed. The FOMC raised rates as expected, but failed to provide an extra hawkish message for markets and what we can expect from now on, is just talk, talk and talk.
The world most important central bankers will gather in Sintra, Portugal for the central bankers' symposium hosted by the ECB with the RBA governor Philip Lowe, the Federal Reserve chairman Jerome Powell, the Bank of England Governor Mark Carney and the ECB president Mario Draghi all discussing the global issues in a panel discussion on Wednesday. The ECB president Mario Draghi likes the old fashioned way of conferences choosing castles and royal palaces for meetings. Therefore Sintra is a traditional rival of the American Jackson Hole and it looks like a very ambitious one, given the structure of keynote speakers.
Otherwise only the second tier indicators are due in the US including the housing market and weekly jobless claims.
US economic calendar for June 18-22
Forecast for the next week
The FXStreet Forecast Poll for the next week turned overly pessimistic forecasting 1.3230 for GBP/USD in one week time from now while spot exchange rate trades around 1.3280level. While last Friday the participants at the FXStreet Forecast Poll projected 1.3454 in one week time, the spot rate is some 140 pips lower. This comes in contrast to previous two weeks when the FXStreet Forecast Poll for the short-term horizon turned almost 100% correct for last two weeks.
For the next week, 65% of participants in the FXStreet Forecast Poll turned GBP/USD bearish compared to 69% of forecasters turning bullish one week ago. A bearish minority of 32% from last week extended to 65% majority with 6% predict a sideways trend for the week ahead.
As long as longer-term forecasts are concerned, the FXStreet Forecast Poll turned very bearish forecasting 1.3263 in the one-month horizon, down from last week’s 1.3545. In three months time from now, FXStreet Forecast Poll sees GBP/USD at 1.3388, down from 1.3508 forecast for 3-months from now last week and 1.3591 in three months time from now predicted two weeks ago.
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Author
Mario Blascak, PhD
Independent Analyst
Dr. Mário Blaščák worked in professional finance and banking for 15 years before moving to journalism. While working for Austrian and German banks, he specialized in covering markets and macroeconomics.
