GBP/USD Weekly Forecast: Pound Sterling weakens as BoE August rate cut hangs in the balance


  • The Pound Sterling tumbled to a new one-month low below 1.2650 against the US Dollar.
  • GBP/USD braces for a relatively data-light week, with US PCE inflation as the only event risk.
  • Will the Pound Sterling extend the range-play as the daily RSI dips below the 50 level?

The Pound Sterling (GBP) extended its losing streak against the US Dollar (USD) into the third straight week, knocking off GBP/USD to a fresh monthly low below 1.2650.

Pound Sterling lost footing in the BoE week

GBP/USD witnessed good two-way business in the past week, staging a modest recovery in the first half of the week before surrendering to sellers following Thursday's Bank of England (BoE) policy announcements.

The US Dollar snapped the previous week’s late recovery, returning to the red amid improving risk sentiment and increased bets of a US Federal Reserve (Fed) interest rate reduction in September. The renewed US Dollar weakness extended into the Juneteenth trading lull on Wednesday, allowing the pair to take on the recovery from the monthly low near 1.2660.

The UK Consumer Price Index (CPI) data released Wednesday showed that the annual inflation dropped to the BoE’s 2% target for the first time since 2021, boosting BoE rate cut bets later this year. The dovish BoE narrative continued to restrain the recovery gains in the Pound Sterling against the US Dollar.

Then, sellers returned on Thursday with a bang after the UK central bank left the policy rate unchanged at 5.25%, as widely expected. Seven policymakers voted to hold rates steady, while Dave Ramsden and Swati Dhingra voted to cut rates by 25 basis points (bps).

The BoE decision was a “finely balanced” one, as policymakers remained wary of any threat from the second round of inflationary pressures. The central bank refrained from explicitly hinting at an August rate cut but money market pricing now sees the prospect of such a move to nearly 50-50 following the subtle dovish hold.

The GBP/USD pair slumped to renew the one-month low at 1.2655 in the BoE’s aftermath, with the pain exacerbated by an impressive US Dollar rebound. The Greenback found fresh demand, despite the mixed US economic data, as the US Treasury bond yields upswing lent support.

Data released on Thursday showed that the US Initial Jobless Claims declined 5,000 to a seasonally adjusted 238,000 for the week ended June 15, retreating from a ten-month high. Meanwhile, Housing Starts fell 5.5% to a seasonally adjusted annual rate of 1.277 million units last month, the lowest since June 2020, below the expected 1.37 million units.

Meanwhile, conflicting messages from Fed policymakers, warranting caution on inflation, also added to the US Dollar upturn. Minneapolis Fed President Neel Kashkari argued that it will probably take a year or two to get inflation back to 2%, implying to keep the policy steady this year. Richmond Fed President Tom Barkin said that the bank “needs clearer inflation signals before rate cut.”

GBP/USD consolidated weekly losses following the UK Retail Sales data and S&P Global Preliminary Purchasing Managers’ Index (PMI) data on Friday. UK Retail Sales jumped 2.9% month over month in May, at the strongest pace since January, as consumer demand increased heading into summer. 

Meanwhile, the seasonally adjusted S&P Global/CIPS UK Manufacturing PMI increased to 51.4 in June from 51.2 in May, beating the market consensus of 51.3. The UK Services Business Activity Index fell to 51.2 in June, much below the 53.0 forecast and the 52.9 previous. Finally, S&P Global Manufacturing PMI in the US rose to 51.7 from 51.3 and the Services PMI climbed to 55.1 from 54.8. These readings came in above analysts’ estimates and supported the USD, making it difficult for GBP/USD to rebound ahead of the weekend.

Week ahead: US inflation is back in focus

After a busy week, Pound Sterling traders are likely to catch a breather, as the economic docket from the United Kingdom (UK) is relatively quiet. There are no high-impact UK data releases, and therefore, attention will be drawn across the Atlantic.

The US statistical releases are also light until Friday when the US Core Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred inflation measure, will hog the limelight.

Thursday will feature the mid-tier US Durable Goods Orders, Jobless Claims and Pending Home Sales data.

Apart from data releases, traders will keenly await the speeches from the Fed and the BoE policymakers for fresh insights on the rate-cut timing, which could significantly influence the GBP/USD price direction.

That said, BoE Governor Andrew Bailey is set to present the Financial Stability Report (FSR) on Thursday but is unlikely to speak on the monetary policy ahead of the July 4 British general elections. 

GBP/USD: Technical Outlook

Following a downside break of the rising trendline resistance last Friday, risks remain skewed to the downside for the Pound Sterling.

Justifying the bearish potential, the 14-day Relative Strength Index (RSI) holds below 50, currently near 45.

Sellers, however, need a decisive break below the immediate support area near 1.2630 to resume the downside momentum. That level is the confluence of the 50-day Simple Moving Average (SMA) and the 100-day SMA.

The 200-day SMA at 1.2556 will be the next line of defense for Pound Sterling buyers, below which a fresh decline toward the May 9 low of 1.2446 cannot be ruled out.

Conversely, buyers need a weekly candlestick close above the 21-day SMA at 1.2737 to negate the bearish pressure in the near term.

Acceptance above the latter would open the door for a test of the March 8 high of 1.2894. Ahead of that, the 1.2800 static resistance will challenge the bearish commitments.

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, aka ‘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.

 

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