GBP/USD Weekly Forecast: Pound Sterling sellers refuse to give up
- Pound Sterling lost ground against the US Dollar after having failed once again at 1.3500.
- GBP/USD gears up for UK data amid a US holiday-shortened week and extended shutdown.
- Technically, GBP/USD remains exposed to downside risks amid a bearish crossover and daily RSI.
The Pound Sterling (GBP) broke the previous consolidation against the US Dollar (USD) to the downside, as GBP/USD tested levels under 1.3300.
Pound Sterling tested bullish commitments
It was all about the USD comeback against its major currency rivals that led to the renewed downside in the GBP/USD pair.
The pair hit the lowest level in ten weeks at 1.3280, after having faced rejection once again at 1.3500 in the early part of the week.
The Greenback stood tall despite the extension of the US government shutdown and persistent bets for two Federal Reserve (Fed) interest rate cuts this year.
The main catalyst behind the USD strength was the sell-off in the Euro (EUR) and the Japanese Yen (JPY) in the face of political upheaval in France and Japan.
French Prime Minister (PM) Sébastien Lecornu resigned, less than a month into his tenure. The move comes just 26 days after he was appointed by President Emmanuel Macron, highlighting the continuing instability that has gripped French politics since last year’s inconclusive parliamentary elections.
Meanwhile, the JPY faced headwinds from “Sanae Takaichi won the Japanese ruling Liberal Democratic Party (LDP) leadership election over the last weekend, setting the country on course for more expansionary fiscal policy and complicating the task facing the Bank of Japan (BoJ),” per Reuters.
Furthermore, the Artificial Intelligence (AI) frenzy-driven record highs on US indices lifted the economic optimism, bolstering the USD’s upsurge.
GBP/USD also drew support from expectations of monetary policy divergence between the Fed and the Bank of England (BoE), as highlighted by a slew of central bank talks.
BoE policymaker Catherine Mann noted on Thursday, “the monetary policy must remain restrictive for longer to create an environment conducive to growth.”
Last week, BoE officials Dave Ramsden, Catherine Mann and Sarah Breeden warned about higher inflationary pressures, advocating the central bank’s prudence on further easing.
Week ahead: What to watch out for
Some delayed data publication from the US Department of Labor (DoL), Bureau of Labor Statistics (BLS) and the Census Bureau could be released in the upcoming week if the US government shutdown reopens even partially.
That said, it will be a quiet start to the week, with the US markets closed in observance of Columbus Day.
On Tuesday, the UK calendar will feature the employment data, which will be the only event of note that day.
The US Consumer Price Index (CPI) data for September is originally scheduled for release on Wednesday, but it remains to be seen if that happens due to the Senate deadlock.
However, there are reports that the US Bureau of Labor Statistics (BLS) has recalled a limited number of staff from furlough to complete the September inflation report. So, the data could be available before the Fed’s October 28-29 policy meeting.
Thursday will see the publication of the British monthly Gross Domestic Product (GDP) and Industrial Production data, followed by the tentative releases such as the weekly US Jobless Claims, Producer Price Index (PPI) and Retail Sales report.
On Friday, the September US labor market data, including the highly influential Nonfarm Payrolls (NFP), scheduled for October 3, could drop if the government funding is restored. Last week’s Jobless Claims will likely be released in that case.
Amid lingering uncertainty over the US economic situation, speeches from Fed policymakers, alongside any fresh geopolitical and trade updates will offer some directional impetus to GBP/USD traders.
GBP/USD: Technical outlook
GBP/USD sellers continued to the critical 50-day Simple Moving Average (SMA), now at 1.3474, initiating a fresh downtrend.
The 14-day Relative Strength Index (RSI) remains below the midline, suggesting that there is more room to the downside.
Adding credence to the bearish bias, the 21-day SMA closed beneath the 50-day SMA on Thursday, confirming a Bear Cross.
The initial support is seen around the 1.3250 region, below which a test of the August low of 1.3142 will be inevitable.
Ahead of that, the 200-day SMA at 1.3173 could offer some comfort to buyers.
On the flipside, GBP/USD must recapture the 1.3400 level on a sustained basis to challenge a powerful confluence zone between 1.3475 and 1.3500, where the 21-, 50- and 100-day SMAs hang around.
If buyers find a strong foothold above that supply zone, the rising trendline support-turned-resistance at 1.3562 will come into play.
The next relevant topside hurdle is located in the 1.3600-1.3620 area. A firm break above the latter will expose the July 4 high of 1.3681.
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.
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