GBP/USD Weekly Forecast: How low can sterling go? BOE and Fed promise explosive answers

Is it Delta or Omicron? The answer is unknown but the increase in UK cases and upcoming restrictions have undoubtedly weighed on the pound – and now the BOE is set to react. On the other side of the pond, the Fed is set to accelerate the pace of tapering as the US economy seems to fire ton all engines. 

This week in GBP/USD: Omicron 

Winter is coming – to British businesses, households, and that famous address: 10 Downing Street. Prime Minister Boris Johnson is in trouble for allegations of a Christmas Party held in the PM's premises in December last year – while the entire country was in lockdown. Uncertainty about the PM's political future came as the icing on the cake for sterling bears. 

The pound had already been struggling with Johnson's intentions to enact new restrictions in the face of rising COVID-19 cases in Britain. Waning immunity from vaccines, winter conditions – and potentially a broader spread than the thought of the new Omicron variant are in play.

However, not all developments related to the new strain are downbeat. The latest researches suggest Omicron is highly contagious but probably milder than previous variants. According to vaccine-makers Pfizer and BioNTech, three shots of their jab should provide sufficient protection.

Concerns about the virus, sent the safe-haven dollar higher, while optimism drove it down, yet another phenomenon boosted the greenback – rising bond yields. Investors' return to stocks after the initial panic waned meant an exit from bonds. In turn, higher returns on Treasuries made the dollar more attractive. 

US data has been upbeat, also keeping the dollar bid. Jobless claims fell to 184,000, the lowest since 1969. A multi-decade comparison is also relevant to inflation – the headline Consumer Price Index hit 6.8% YoY, the highest since 1982, and Core CPI reached 4.9%.

While faster price rises mean more tightening from the Fed, such a move was already priced in and the greenback suffered a minor "buy the rumor, sell the fact" response. 

UK events: Busy week culminates with the BOE

How bad will the current winter wave be? After Alpha and Delta hit the UK, Brits are bracing for a rapid circulation of Omicron – which is probably underreported despite elevated levels of genetic sequencing performed in Britain. Investors will be watching daily cases and also hospitalizations.

Pressure on the health system is the main trigger of restrictions. Any additional curbs could weigh on sterling, while some stability in covid statistics could allow for the pound to rise.

UK covid remains on the up:

Source: FT

All eyes are on the Bank of England's decision on Thursday. After a "close call" on raising rates in November, fears of the virus's impact on the economy are likely to convince the BOE to leave rates unchanged once again. Sterling is set to react the voting pattern, after two out of nine members dissented last time and opted to hike borrowing costs. 

See BOE Preview: Omicron eliminates rate hike chances, voting pattern critical to GBP/USD reaction

The BOE and traders have two additional top-tier releases to digest earlier in the week. Labor market figures are due out on Tuesday, and will likely show a low unemployment rate in October, similar to September's 4.3%. Wage growth is off the highs, but figures any increase – due to shortages – could boost the pound.

Inflation data is due out on Wednesday, and contrary to the US, the focus is on the headline. Prices rose by 4.2% YoY in October and another increase cannot be ruled out. Will hot inflation pressure BOE members to vote for a hike? That would be the thinking among traders, who will likely react to the data. 

Retail sales data for November is released on Friday and could impact sterling in case the BOE decision keeps the pound steady. After a jump of 0.8% in October, the month including Black Friday could see an increase, albeit a smaller one. 

Here is the list of UK events from the FXStreet calendar:

 

US Events: Almost entirely about the Fed

The world's most powerful central bank is set to tighten its policy but by how much? Federal Reserve Chair Jerome Powell signaled that accelerating the tapering process is high on the agenda, and asked to retire the term "transitory" from inflation. After his renomination to lead the Fed and robust inflation figures, Powell is turning more hawkish.

The bank began cutting down its $120 billion/month bond-buying scheme, at a pace of $15 billion/month. Will it now accelerate this taper speed to $20 or $25 billion? Will such a move, resulting in printing fewer dollars, begin immediately or only at a set date? Answers to these questions have implications for the timing of the first increase in borrowing costs, which could happen in the spring rather than in the summer.

On the one hand, the economy is creating jobs at a rapid rate, unemployment dropped to 4.2% and inflation hit the highest since 1982. On the other hand, covid cases began rising quickly even before Omicron entered America. 

Powell will likely push for faster tapering, erring on the side of caution with $20 billion per month, starting in January. However, he may stress that as the Fed accelerated its pace now, it could do so once again – or conversely slow it down if things worsen. His goal is to keep markets calm ahead of Christmas. 

By not rocking the boat to much, the Fed could let stocks rise and the dollar edges lower. Investors never like tighter monetary policy, but they could breathe easier if hawks do not get all they aim for. 

Ahead of the Fed, Retail Sales are of interest. After several outstanding increases in consumption, the calendar is pointing to roughly half the rise seen in October – 0.8% on both the headline and the control group. The reaction will probably be muted as it is released just hours ahead of the Fed. 

Weekly jobless claims, Markit's purchasing managers' indexes and housing statistics may move markets, but reactions to the Fed decision will likely outweigh any second-tier economic figure. 

Apart from the central bank's decision, investors will follow news related to the Omicron variant. Currently, there is relatively solid knowledge that it is more contagious, a high level of confidence that it is less lethal, and high uncertainty about vaccine resistance. Markets and the safe-haven dollar remain sensitive to every headline. 

Here are the upcoming top US events this week:

GBP/USD technical analysis

Pound/dollar has been extending its decline while averting oversold conditions on the daily chart. The Relative Strength Index (RSI) is holding above 30. This development means downside momentum has somewhat moderated but bears still remain in control. 

The currency pair is trading in a downtrend channel since late November, setting lower highs and lower lows, almost on a daily basis. 

Some support is at 1.3195, which was a swing low in late November, and it is backed up by the 2021 trough of 1.3175. Further down, 1.3110 and 1.30 await GBP/USD.

Significant resistance is only at 1.33, which capped a recent recovery attempt, but that gap between current prices and that high bar do not help cable recover. Further above, 1.3350 cushioned GBP/USD in November and now works as resistance. The 1.34 line separated ranges and remains strong. 

GBP/USD sentiment 

Even if the Fed refrains from tightening too fast and the BOE leaves a February rate hike on the table, Britain's covid and political woes could tip the scales lower, extending the bearish trend. 

The FXStreet Forecast Poll is pointing to mild short-term pain, followed by a significant upside move in the medium and long terms. It is essential to note that experts have been gradually downgrading their average targets, but refuse to capitulate. 

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