GBP/USD Weekly Forecast: Only the rate hike can save Sterling from Brexit mayhem

• While news of Theresa May taking a stronghold of Brexit negotiations kept Sterling afloat, EU’s refusal reveals dreamland May and her team is living at.
• Sterling is closing the week flat after suffering Brexit negotiations defeat.
• The Bank of England is widely expected to raise the Bank rate on Thursday together with the publishing of August Inflation Report with individual views of each Monetary Policy Committee member split.
• The FXStreet Forecast Poll remains slightly bearish for the 1-week forecast but turned bullish with price predictions for 1-month and 3-months period while factoring in the rate hike effect.

It is the Bank of England’s Monetary Policy Committee (MPC) to save Sterling from slumping lower as it is expected to hike rates next Thursday when the MPC meets for regular monetary policy review releasing the quarterly macroeconomic and policy forecast in ASugust Inflation Report. Although the timing is not perfect, the Bank of England Governor Mark Carney will have an hour-long press conference after the meeting to explain the move and justify the MPC decision.

August MPC meeting is also the last one for Ian McCafferty, a long-term hawk proposing interest rate hikes. McCafferty’s successor Jonathan Haskel appears to be more dovish, at least as long as his nomination hearing in the UK parliament is concerned and that would have shifted the MPC’s balance towards a more dovish stance.

The decision of the Bank of England MPC not to raise the Bank rate in August due to prevailing uncertainties related to either Brexit or the economic and inflation outlook would probably weigh heavily on Sterling. 

By the end of the fourth week of July, Sterling is trading down 0.15% below 1.3100 level after the negative mood carried over from Thursday after EU chief negotiator Michel Barnier said the bloc refuses the UK latest proposal for post-Brexit trade setup, sending Sterling down 100 pips.

The US second-quarter GDP rose 4.1% over the annualized quarter meeting the market estimates despite advisors to the US President whispered the US growth rate was near 5% few days before the release. As the US GDP growth met the estimates, the consequent currency reaction of the US Dollar was rather muted with US Dollar rising few pips against the Japanese Yen while showing little reaction to the European majors.

The news of the UK Prime Minister taking a firm grip over the Brexit negotiations nominating Domonic Raab for Brexit secretary saw Sterling rising to the highest level of above 1.3200 during the fourth week of July, but the failure to pass through poses a big question mark over the ability of a new team to progress with Brexit negotiations.

Brexit talks are set to resume in mid-August, but there are about six more weeks left for the negotiations before the final Brexit agreement is expected to be finished with time shortage pressing Sterling lower.

Fundamentally, the Bank of England rate hike prospects anchor Sterling while Brexit uncertainties weigh.

Technical analysis

GBP/USD daily chart

The daily chart GBP/USD opened the fourth week of July at 1.3120 with news of UK Prime Minister Theresa May taking control over Brexit negotiations boosting the currency pair to 1.3220 region. With EU’s chief negotiator Michel Barnier denying any proposals of the Brexit new team in the UK the currency pair broke below 1.3100 to end the week virtually unchanged. With the Bank of England expected to hike the Bank rate to 0.75% next Thursday, the currency pair is well pegged to trade above 1.30000 even as technical oscillators like Momentum and the  Relative Strength Index are neutral on the daily chart and the Slow Stochastic making a bearish crossover in the neutral territory.  The GDP/USD should close below 1.3100 representing 38.2% Fibonacci retracement level of the post-Brexit fall from 1.5020 to 1.1940 to target lower levels with the near-term target of 1.3000 and then 1.2670, representing 26.3% Fibonacci retracement of a post-Brexit slump.

GBP/USD 1-hour chart

With the spot rate remaining tight within a narrow range of 1.3080-1.3220, the technical picture on GBP/USD on the 1-hour chart is neutral. The currency pair changes short-term trends from the upward to the downward sloping trends of short-term character. Technical oscillators already turned lower with Slow Stochastics just turning up from the oversold territory.  Both Momentum and the Relative Strength Index fell lower as GBP/USD approached 1.3080, last week’s low on Friday. While stuck in a neutral trend, the next hurdle for GBP/USD the trend up is 1.3150 before testing the round big figure of 1.3200 as next hurdle. On the downside, key resistance is 1.3100 before moving towards psychologically important 1.3000.  

Economic fundamentals in the week ahead

The UK macro calendar for the fourth week of July includes the monetary policy decision from the Bank of England on super Thursday,  August 2 Monetary with MPC meeting and the release of August Inflation Report. The monetary policy decision will be followed by the press conference with the Bank of England Governor Mark Carney and his Deputy Governors Ben Broadbent and sir David Ramsden.  

The economic calendar will be complemented by the UK PMI data including manufacturing, services and construction sectors that are all expected to decelerate slightly in July after unexpectedly rising in June

UK economic calendar for July 30- August 3

On the other side of the Atlantic, the first week of August is set to be full of important macro releases including the Federal Reserve’s policy meeting. While Fed hiked rates in June, no Fed funds rate changes are expected in July so the attention shifts to the wording of Fed regarding the policy outlook in light of recent data development.

By far the most important report is next Friday’s non-farm payroll release with employment data for the month of July. It is expected that the total number of new jobs in the US increased by 195K with wages rising 2.7%. The unemployment rate ticked up in June to 4.0%, but it is expected to fall to 3.9% in July as the participation rate is expected to fall.

The ISM report on both manufacturing and non-manufacturing sectors will headline Wednesday and Friday respectively with both expected to tick slightly lower in July.

The macro picture will be complemented by the core personal consumption expenditure price index that is seen decelerating to 1.9% y/y in June.

US economic calendar for July 30- 31

US economic calendar for August 1-3

Forecast for the next week

The FXStreet Forecast Poll for the week ahead turned slightly more bearish for Sterling estimating the exchange rate of GBP/USD at 1.3078, down from 1.3125 spot rate at the time of finishing this report of Friday afternoon in Barcelona.

While bullish versus bearish predictions distributed 28% of bullish versus 64% of bearish predictions among forecasters participating at the FXStreet Forecast Poll last week, the current forecast for the first week of August expects spot rate to fall to 1.3078 with 32% of bullish versus 63% of bearish predictions for the week ahead.  With the share of bearish forecasters unchanged, the number of bullish forecasts increased given the economic calendar, in which the Bank of England is expected to hike the Bank rate to 0.75% at the cost of forecasters expecting the sideways trend to prevail.

As long as longer-term forecasts are concerned, the FXStreet Forecast Poll turned a bit more bullish, probably factoring in the rate hike prospects. Compared to last week when FXStreet Forecast Poll saw GBP/USD at 1.3031 in one month time from now, the median forecast for one month is now 1.3171  compared to 1.3218 two weeks ago and compared to 1.3258 three weeks ago. The same bullish turn is seen in predictions for three months time from now, with FXStreet Forecast Poll forecasting GBP/USD at 1.3195 in three months time from now compared to 1.3118 last week and 1.3245 two weeks ago and week and 1.3249 predicted three weeks ago. 

FXStreet Forecast Poll

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