GBP/USD Weekly Forecast: Bulls’ fate hinges on US inflation data, Fed verdict

Following a positive week, Pound Sterling buyers flexed their muscles as the US Dollar continued its corrective decline. The absence of high-impact economic data from both sides of the Atlantic and the market’s repricing of the US Federal Reserve (Fed) interest rates outlook favored GBP/USD buyers. All eyes now remain on a bumper week ahead for a fresh direction in the major.

GBP/USD: What happened last week?

After yo-yo-ing between gains and losses in the first half of the week, the US Dollar finally succumbed to the bearish pressures in a relatively data-quiet week. Resurgent US Dollar supply motivated GBP/USD buyers to take out the critical resistance at 1.2550.

Markets nearly cemented expectations that the Federal Reserve will pause its tightening cycle after the ISM Services PMI, while the weekly Initial Jobless Claims data from the United States disappointed and raised economic concerns. The Institute for Supply Management (ISM) said its services PMI fell sharply to 50.3 last month from 51.9 in April and against expectations of 51.5. All its sub-indices, including the Price Paid component, also disappointed markets. US Factory Orders increased by 0.4% after a 0.6% gain in March but missed the 0.5% estimates. Meanwhile, the US Initial Jobless Claims jumped to the highest level since October 2021 at 261K last week.

Amidst dovish Fed expectations and a poor run of US macro data, the US Treasury bond yields snapped their recovery momentum and reversed sharply from weekly highs, adding to the weight on the US Dollar. The Greenback bulls, however, received temporary respite midweek after the Bank of Canada (BoC) unexpectedly hiked rates by 25 basis points (bps) to 4.75% and reminded markets that if the Fed potentially skip the rate hike next week, it wouldn’t mean that the US central bank has ended its tightening cycle. More rate hikes from the Fed could still be seen later this year.

The GBP/USD pair continued to track developments around the US Dollar in the absence of any significant UK economic data releases and speeches from the Bank of England (BoE) policymakers. The UK Prime Minster Rishi Sunak met with the US lawmakers and business representatives during his trip to Washington DC this week. Sunak was said to advocate for a deepening of economic ties between the United Kingdom and the United States.

Week ahead: Federal Reserve in the spotlight

GBP/USD traders witnessed a sense of calm, data-wise, ahead of the Federal Reserve storm. The blockbuster week kicks off with a quiet Monday, giving enough time for investors to gear up for Tuesday’s all-important United States Consumer Price Index (CPI) data due at 12:30 GMT. Economists are expecting the headline annual CPI inflation to drop sharply to 4.1% in May, compared with the 4.9% clip booked in April. Softening inflationary pressures are likely to strengthen the Fed’s motive to pause interest rate hike on Wednesday when it concludes its two-day policy decision.

The United Kingdom Employment data will also provide fresh insights into the labor market conditions, impacting the Pound Sterling. Markets will also await Bank of England Governor Andrew Bailey’s testimony about central bank independence before the House of Lords economic affairs committee later on Tuesday.

Wednesday will see the UK monthly Gross Domestic Product (GDP) data release alongside the Industrial Production and Trade Balance data. In the US session, the Producer Price Index (PPI) report will be released ahead of the highly-anticipated Federal Reserve policy announcements. The Fed is likely to bring a halt to its tightening cycle, although the Dot Plot chart and Chair Jerome Powell’s presser will set the tone for markets in the coming weeks.

China’s activity data will be reported on Thursday, which could impact the broader market sentiment. The main risk event of that day remains the European Central Bank (ECB) interest rate decision. Any surprise by the central bank could infuse fresh volatility in the Euro, having a EUR/GBP cross-driven ‘rub-off effect’ on the Britsh Pound. Also, traders will watch out for the United States Retail Sales and Jobless Claims data on Thursday for fresh US Dollar valuations.

The UK Consumer Inflation Expectations survey conducted by the BoE will be published on Friday amid an otherwise light-UK docket. Meanwhile, the US calendar will feature the Preliminary University of Michigan (UoM) Consumer Sentiment and Inflation Expectations data.

The Fed policymakers will return to the rostrum from Friday, as their ‘blackout period’ concludes. Their take on the Fed’s policy outcome will be critical for the market’s pricing of the next Fed move and the US Dollar price action in the week ahead.

GBP/USD: Technical outlook

As observed on the daily candlesticks, GBP/USD chart an upside break from a month-old symmetrical triangle formation, having closed Thursday above the descending trendline resistance, then at 1.2513.

Pound Sterling buyers recaptured the key 21- and 50-daily moving averages (DMA) on the bullish breakout, hitting the highest level in four weeks above 1.2550.

The 14-day Relative Strength Index (RSI) holds comfortably above the midline, backing the bullish potential in the GBP/USD pair.

If the upswing gathers stream in the week ahead, Pound Sterling bulls are likely to aim for May highs at 1.2680. However, acceptance above the 1.2600 round figure is critical.

The 1.2750 psychological barrier will be a tough nut to crack for GBP/USD buyers on a sustained upside.

Alternatively, any retracement from the monthly top will find immediate support at the triangle pullback at 1.2500. A deeper correction will put the strong support around the 1.2450 level at risk. That zone is the confluence of the 21 and 50 DMAs.

Further south, the triangle support at 1.2401 could come to the rescue of Cable bulls, below which a sharp sell-off toward the mildly bullish 100 DMA at 1.2308 cannot be ruled out. At that level, the May 25 low coincides. 

GBP/USD: Forecast poll

FXStreet Forecast Poll paints a mixed picture for GBP/USD in the short term, with the average one-week target aligning slightly below 1.2550. The one-month outlook remains bearish.