GBP/USD Weekly Forecast: Pound Sterling struggles as low inflation propels BoE rate cut bets
- The Pound Sterling hit two-month lows against the US Dollar, then rebounded.
- GBP/USD looks to S&P Global PMIs and Bailey’s speeches for fresh trading impetus.
- Technically, any Pound Sterling upswings could be short-lived as long as the daily RSI stays bearish.
The Pound Sterling (GBP) fell for the third consecutive week against the US Dollar (USD), as the GBP/USD pair tested levels below the 1.3000 round level for the first time since mid-August before staging a late recovery.
Pound Sterling pounded on increased BoE rate cut bets
Markets turned more dovish on the Bank of England’s (BoE) monetary policy outlook while sealing in a smaller interest-rate cut by the US Federal Reserve (Fed), thus strengthening the US Dollar’s advance at the expense of the Pound Sterling.
The annual UK Consumer Price Index (CPI) inflation fell sharply to 1.7% in September from 2.2% in August, the lowest reading since April 2021 and driven down by lower airfares and petrol prices, the Office for National Statistics (ONS) said on Wednesday. The data came in below the expected 1.9% figure. On Tuesday, the ONS said that the UK pay growth, as measured by the Average Earnings Excluding Bonus, fell below 5.0% in the three months to August.
Falling inflation and softening labor market conditions made the case for rate reductions by the BoE at a faster pace. Following these data, interest rate futures showed investors were pricing a 90% chance of two BoE quarter-point rate cuts by the end of this year, up from roughly 80% at the start of the week.
Meanwhile, the unabated demand for the US Dollar exerted downward pressure on the pair. The bets for a 25 basis points (bps) Fed rate cut next month remained unfazed despite several dovish speeches from Fed policymakers and strong US Retail Sales data, allowing the buck to build on its recovery rally. US Retail Sales rose 0.4% in September after an unrevised 0.1% gain in August, the US Census Bureau said on Thursday.
The USD’s upsurge has lately been sponsored by the market’s optimism that Republican nominee and former US President Donald Trump is set to win the 2024 US presidential elections. Trump’s fiscal and trade policies are seen as inflationary and positive for the Greenback.
Further, rife Middle East geopolitical tensions also contributed to the bullish momentum in the safe-haven US Dollar. Amongst the latest Mideast developments, the Iran-backed militant group Hezbollah said it will escalate war with Israel after Israel’s Foreign Minister confirmed the killing of Hamas leader Yahya Sinwar on Thursday.
On Friday, the GBP/USD pair staged a rebound from two-month lows of 1.2974, as US Dollar buyers resorted to profit-taking after the solid performance during the week. Stronger-than-expected Britain’s Retail Sales data also aided the Pound Sterling recovery. United Kingdom Retail Sales unexpectedly rose by 0.3% in September, compared to a 0.3% decline expected, according to the latest figures from the ONS.
Week ahead: Eyes on PMIs and policymakers
Pound Sterling traders brace for a relatively data-light week, as the first half of the week is devoid of any high-impact data releases from both sides of the Atlantic.
However, the Fed and the BoE policymakers are scheduled to make their appearances, with BoE Governor Andrew Bailey due to speak on Tuesday and late Wednesday.
Thursday will feature the S&P Global preliminary Purchasing Managers Index (PMI) data for October from the US and the UK. The US Jobless Claims data will also be published on the same day. The BoE hawk Monetary Policy Committee member Catherine Mann is due to speak after Cleveland Fed President Beth Hammack’s speech.
The mid-tier US Durable Goods Orders data for September will be released on Friday, making it a quiet calendar heading into Saturday’s speech by BoE Governor Bailey.
Apart from the data releases and the central banks’ commentaries, investors will pay close attention to the market’s pricing of the outcome of the US elections while Mid-East geopolitical developments will also be in focus.
GBP/USD: Technical Outlook
The GBP/USD pair extended the previous week’s downside break of the critical 50-day Simple Moving Average (SMA), then at 1.3101.
The extended decline tested the 100-day SMA support near 1.2960, with more downside likely on the cards, as the 14-day Relative Strength Index (RSI) holds comfortably below the 50 level, currently near 44.
Therefore, any recovery attempt in the pair is likely to be sold off unless the Pound Sterling recaptures the 50-day SMA support-turned-resistance, now at 1.3132.
The next topside barrier is seen at the 21-day SMA at 1.3188. A meaningful uptrend could unfold on a sustained move above that level, opening the door for a test of the 1.3250 psychological barrier.
Pound Sterling will then target the 1.3300 round level should the bullish momentum gain traction.
On the flip side, a daily candlestick closing below the 100-day SMA at 1.2960 could expose the 200-day SMA cap at 1.2796.
Ahead of that, the June 12 high of 1.2861 could offer temporary respite to buyers.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
Author
Dhwani Mehta
FXStreet
Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.
