GBP/USD Weekly Forecast: Dollar on the stairways to heaven with US rate hike due as Brexit haunts Sterling

 

• US Dollar is fundamentally supported by divergent rate outlook between the US and the UK.
• The FOMC is set to hike rates next week while macro data in the UK still point to shaky fundamentals.
• GBP/USD is set to be capped between 1.3200 and 1.3380 levels representing 38.2% and 50% Fibonacci retracement of the previous uptrend. 

Sterling is set to close the week flat against the US Dollar after opening at 1.3350 on Monday while rising less than 100 pips to the last week’s high of 1.3447 before retreating to 1.3350 again.

The fundamental news of the UK construction PMI meeting the April’s reading of 52.5 in May and even more importantly the UK services PMI rising to 54.0 in May pushed Sterling above the key resistance of 1.3380 representing the coincidence of 50-period simple moving average (SMA) on a 1-hour chart and the 61.8% Fibonacci retracement of the previous uptrend from 1.2770 to a 22-month high of 1.4377 from April 17.

The Brexit related news roiled the market by the end of the first week of June first with rumors of the UK Brexit secretary David Davis stepping down and with the chief EU Brexit negotiator Michel Barnier rejecting the Irish backstop proposal applying to all UK that has finally sent Sterling towards the levels from the beginning of last week.

Should the GBP/USD close below strong resistance level of 1.3380, the prospects for the currency pair in the coming week are rather negative as the two weeks of a free fall stabilization saw the technical oscillators correcting higher opening the way for further downside potential.

More importantly, the fundamental outlook for both the UK and the US is set to favor the US Dollar with the US Federal Reserve widely expected to hike rates next week, while the set of most important macroeconomic indicators all due for the UK next week are unlikely to push the outlook for the UK rate increases anywhere closer than November this year.

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• UK services activity lead the economy from the adverse weather-related blip

Technical analysis

GBP/USD daily chart

The daily chart sees GBP/USD correcting higher from 1.3205 low with technical oscillators pointing in different directions. While the Relative Strength Index leaped off the oversold territory and turned again with Sterling falling the levels from the beginning of last week, Slow Stochastics is still in the upward trajectory. The GDP/USD was unable to cross above the 38.32% Fibonacci retracement level of the previous uptrend from 1.2020 level all the way up to the 22-months high of 1.4377. The GBP/USD is currently trapped in ranges formed by 38.2% and 50% Fibonacci retracement of the above-mentioned move at 1.3200 and 1.3450. 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 1.3300 before attacking 1.3200 represented by 50% Fibonacci retracement of the uptrend from 1.2020 to 1.4377. 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

The 1-hour chart on GBP/USD is painting a bit different picture with the technical oscillators already being lower with the spot exchange rate falling back to 1.3350 area. Technically, the break below 1.3580 representing 61.8% Fibonacci retracement of the upmove from 1.2770 to 1.4377 means that 1.3300 is the next immediate target in Sterling’s correction lower. 

Economic fundamentals in the week ahead

The UK macro picture is very colorful for the second week of June with all the important macro releases due between Monday and Thursday next week. On Monday, the UK manufacturing output in April is due with 0.3% m/m growth rate expected reflecting the PMI in manufacturing that has swiftly recovered from March bad weather-related lows in April.

The UK employment report is due on Tuesday with nominal wages seen rising 2.9% over three months ending in April while the unemployment rate is expected to remain steady at a four-decade low of 4.2%. The UK inflation in May is expected to pick up slightly to 2.5% y/y after unexpectedly decelerating to 2.4% y/y in April. The core inflation is at the same time expected to dwell at the unchanged level of 2.1% y/y in May.

Finally, Thursday is set to deliver the May retail sales report with monthly total sales seen rising 0.6% while core sales excluding auto fuel sales are expected to increase by 0.3% m/m.

Should the macro indicators come out in line with the expectations, the macro picture for the Bank of England will remain unaltered with inflation approaching the inflation target while wage growth surpasses the inflation growth rate only by a couple of tenths of a percent. This means that the outlook for the UK real, inflation-adjusted wage growth remains a drag for the growth outlook.  

UK economic calendar for June 11-15

On the other side of the Atlantic, the FOMC rate hike headlines the agenda for the next week. Apart from the interest rate hike that has been pushing the US Dollar higher across the board for weeks ahead of the June’s rate decision, there are May inflation and retail sales data due. 

While the US core inflation is expected to accelerate to 2.2% over the year in May, the US core retail sales are forecast to increase 0.4% over the month with both data releases further strengthening the case of Fed hiking rates 2 more time this year including the rate hike next week. 

With the June rate hike being fully priced in June, the FOMC’s outlook for the future become the most important FX market driver, with the US Dollar benefiting from any hints oif more than one more rate hike this year after June’s decision. 

US economic calendar for June 11-15

Forecast for the next week

The FXStreet Forecast Poll for the next week is slightly optimistic forecasting 1.3454 for GBP/USD in one week time from now while spot exchange rate trades around 1.3400 level. The positive thing about the FXStreet Forecast Poll for the short-term horizon is that it turned almost 100% correct two weeks ago while missed the end of this week by 50 pips only with the GBP/USD was forecast at 1.3454 and the end of the week spot rate is around 1.3400.

For the week ahead the FXStreet Forecast Poll 65% of forecasters turned bullish,  compared to 55% bullish forecaster last week and 45% two weeks ago. Bearish minority shrank to 32% for next week compared to 40% from last week and 45% two weeks ago. Once again only 5% predict a sideways trend for the week ahead.

As long as longer-term forecasts are concerned, the FXStreet Forecast Poll expects GBP/USD to reach 1.3545, up from 1.3511 last week 1.3520 level predicted two weeks ago for in 1-month time. In three months time from now, FXStreet Forecast Poll sees GBP/USD at 1.3508, down from 1.3591 in three months time from now in last week and 1.3658 predicted two weeks ago. 

FXStreet Forecast Poll