GBP/USD Weekly Forecast: Pound Sterling bulls throw in the towel ahead of UK, US inflation data

• GBP/USD extended correction as the US Dollar recovery gathered steam.
• Focus shifts to the UK and the US inflation data amid diverging policy outlooks.
• Risks remain skewed to the downside for GBP/USD amid bearish technical setup.

Pound Sterling sellers retained control in the past week as the US Dollar’s recovery momentum gathered pace amid easing US Federal Reserve (Fed) rate cut bets, fading banking sector concerns and renewed US debt ceiling optimism. GBP/USD, therefore, booked another weekly loss after surrendering the 1.2500 barrier yet again. Cable traders now gear up for an action-packed week ahead.

GBP/USD: What happened last week?

Having witnessed a dead cat bounce at the start of the week, GBP/USD extended its corrective move lower through the balance of the week amid resurgent demand for the United States Dollar (USD). A combination of factors, including growing optimism over a potential US debt ceiling deal, subsiding banking sector fears, hawkish Federal Reserve comments and upbeat US economic data, provided extra legs to the US Dollar recovery.

On Monday, GBP/USD snapped the previous week’s decline and rebounded firmly to recapture the 1.2500 level as investors adjusted their US Dollar positions ahead of Tuesday’s critical meeting between US President Joe Biden and House Speaker Kevin McCarthy on raising the debt ceiling limit to avoid a "catastrophic default" by June 1. Markets also geared up for the only relevant high-impact data from the United States in the week, the Retail Sales report, triggering a US Dollar pullback.

However, US Dollar bulls regained control from Tuesday onwards, as hopes grew that a US default would be averted after President Biden and McCarthy expressed confidence in a deal closing in. The US Treasury bond yields also cheered reduced risks of a recession and easing Federal Reserve (Fed) rate cut bets, backing the return of risk appetite. The Greenback surged despite risk-on flows, weighing heavily on GBP/USD.

Tuesday’s downbeat United States Retail Sales, which rose 0.4% MoM against the 0.7% growth expected, were offset by the hawkish Fed speeches, saving the day for the US Dollar bulls. Meanwhile, Reuters reported that the meeting ended on an upbeat and unexpected note as McCarthy, coming out of the meeting with Biden and other congressional leaders, said, "It is possible to get a deal by the end of the week."

President Biden expressed confidence there will be no US default midweek while a rally in regional bank stocks lifted the mood. Western Alliance Bancorp led the regional banks' rally a day after the lender said its deposits grew by more than $2 billion in the quarter that ended May 12. 

Elsewhere, Chicago Fed Chief Austan Goolsbee said it was premature to be discussing interest rate cuts. Thomas Barkin, president of the Federal Reserve Bank of Richmond, said he would be comfortable with more rate increases if that's what is needed to bring inflation down. On Thursday, Dallas Fed President Lorie Logan said that data at this time does not support skipping an interest rate hike in the June meeting. St Louis Fed President James Bullard advocated higher rates once again, suggesting that they are insurance against inflation.

Meanwhile, April's downbeat Chinese activity data clouded the economy’s recovery outlook, weighing on risk currencies such as the Pound Sterling. China’s Industrial Production for April rose by 5.6% YoY, compared to the 10.9% expected by economists. Retail Sales increased by 18.4%, lower than economists’ forecast of a surge of 21.0%.

The labor market report from the United Kingdom docket also failed to offer any respite to Pound Sterling buyers. The employment data released by the Office for National Statistics (ONS) showed that the country’s ILO Unemployment Rate rose to 3.9% in the quarter to March from the 3.8% registered in the three months to February, above the 3.8% expected. This is the highest reading in more than a year and signals that the UK labor market is gradually cooling down. The claimant count change also showed an unexpected increase of 46.7K in April.

The GBP/USD picked up with Federal Reserve Chairman Jerome Powell’s words, as he noted that, while strongly committed to tame inflation, the recent banking crisis, which led to tighter credit standards, has eased the pressure to hike interest rates. "Our policy rate may not need to rise as much as it would have otherwise," Powell added.

Week ahead: It's all about inflation

Following a data-light week, traders brace for a busy one, with all eyes on inflation reports from both sides of the Atlantic.

Tuesday follows a data-dry Monday, as Preliminary Manufacturing and Services PMIs reports will be released in the United Kingdom and the United States that will throw fresh light on the state of the economies. The US docket will also feature the New Homes Sales report following the business PMIs.

The UK Consumer Price Index (CPI) will be widely watched on Wednesday after the country reported another double-digit inflation in March. The Minutes of the Federal Reserve May meeting will also influence Cable traders later on Wednesday. Markets will look for cues on whether the world’s most powerful central bank debated a pause in the meeting while eyeing hints on a rate hike pause.

Moving on, the United States will report the second revision to the first quarter Gross Domestic Product (GDP) data on Thursday alongside the weekly Jobless Claims and before the Pending Homes Sales report.

Friday will see an eventful end to the week, with the UK Retail Sales data dropping ahead of the US Durable Goods Orders data and the Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge. Investors will also look forward to the Personal Spending data and the revisions to the University of Michigan’s (UoM) Consumer Sentiment and Inflation Expectations prints.

Meanwhile, speeches from the BoE and Fed policymakers will be closely scrutinized as well as fresh updates on the US debt ceiling talks.  

GBP/USD: Technical outlook

Technically, the short-term outlook for the GBP/USD pair appears bullish, as the pair holds above the critical upward-sloping 50-Day Moving Average (DMA) at 1.2410.

Pound Sterling bulls will look for immediate respite near 1.2350, around where the April 10 and 17 lows align. A sustained break below the latter will expose the 1.2275 cushion, the confluence of the bullish 100 DMA and the April monthly low.

Further south, a test of the 1.2000 figure could be on the cards if the downside momentum gains traction. The 14-day Relative Strength Index (RSI) holds wells below the midline, supporting the bearish potential.

On the flip side, Pound Sterling's turnaround could be meaningful only on acceptance above the flattish 21 DMA at 1.2511. Further up, the weekly top of 1.2546 could challenge the road to recovery, as Cable bulls look to reclaim the 1.2600 round level. 

GBP/USD sentiment poll

The FXStreet Forecast Poll  for the GBP/USD pair hints at a near-term decline but more gains in the longer view. The pair is seen on average at 1.2390 next week, as 56% of the polled experts are bearish. However, they decline to 33% in the monthly view, when bulls increase to 43%. Buyers are also a majority in the quarterly perspective, up to 52% and with an average target of 1.2513. 

 According to the Overview chart, the risk of a steeper decline seems limited. The thee moving averages under study remain near their recent highs, and only the shorter one offers a modest bearish slope. The chart also shows that, as time goes by, the range of potential targets increases, with the pair seen trading mostly between 1.2200 and 1.2900 in three months.