GBP/USD Weekly Forecast: Pound Sterling set for further weakness as Fed, BoE decisions loom

  • GBP/USD hit three-month lows amid extended US Dollar rally.
  • Fed and BoE policy announcements could trigger a big reaction in GBP/USD.
  • GBP/USD remains vulnerable after a sustained break below the 200-day SMA.

The Pound Sterling extended its losing streak against the United States Dollar (USD) into a second week, as the GBP/USD pair surrendered the 1.2400 level. GBP/USD is not out of the woods yet, and all eyes turn toward the US Federal Reserve (Fed) and the Bank of England (BoE) monetary policy decisions.

GBP/USD: What happened last week?

The GBP/USD pair remained in the red for most of the week, having started the week on a positive footing. The main underlying reason was the unabated demand for the US Dollar amid a set of upbeat and high-impact economic data.

The US Dollar, however, incurred steep losses on Monday, as it bore the brunt of a big figure sell-off in the USD/JPY pair. Bank of Japan (BoJ) Governor Kazuo Ueda said over the weekend that the central bank’s focus will now be “a quiet exit” from the ultra-loose monetary policy, which triggered a massive surge in the Japanese Yen. Signs of stabilization in the Chinese economy, after the country’s inflation rose in August, also weighed on the safe-haven US Dollar.

GBP/USD rebounded firmly to test 1.2550 on broad US Dollar weakness but failed to sustain at higher levels. The Greenback buyers jumped back into the game on the expectation that the Fed will likely leave the door open for one more rate hike after standing pat at its policy meeting next week. Investors remained expectant of the all-important US Consumer Price Index (CPI) data release due midweek, preferring to hold the US Dollar amid an upside consolidation in the US Treasury bond yields and optimism surrounding a likely ‘soft landing’ for the US economy.

Heading into the US CPI showdown on Wednesday, the US Dollar maintained its buoyant tone following a US tech stocks sell-off, led by slides in Apple and Oracle shares. Investors assessed the renewed hawkish expectations surrounding the European Central Bank (ECB) and BoJ, along with the implications on global economic growth and central banks’ outlook, in the face of surging oil prices.

GBP/USD also suffered from the mixed UK labor market report, which showed the Unemployment Rate higher to 4.3% in the three months to July. The UK economy saw a job loss of 207K in the same period, having shredded 66K jobs in the three months to June. The market consensus was for a -185K figure. The UK’s Average Earnings, excluding bonuses, rose 7.8% 3Mo/YoY July, compared with a 7.8% increase in the previous period, registering a joint-record high.

On Wednesday, the currency pair saw volatile trading on the US inflation data release and staged an impressive bounce from below 1.2450 after the US Dollar failed to find any inspiration from the in-line-with-estimates US CPI data. The annual United States inflation gauge rose 3.7% in August, compared with a 3.6% rise expected. The CPI rose 0.6% MoM in August, its biggest monthly gain of 2023 and matched the market estimates. The core CPI increased 0.3% MoM and 4.3% YoY, against estimates for 0.2% and 4.3%, respectively.

The data reaffirmed that inflationary pressures in the US are softening, offering little for the Fed hawks to cheer. Markets continued to price a Fed rate hike pause next week while predicting a 40% probability of a rate increase in November.

The downside momentum in the major regained traction on Thursday, following strong US Retail Sales, Producer Price Index (PPI) and Jobless Claims, all of which showed strengthening signs of US economic resilience. The encouraging data revived hawkish Fed bets and triggered a fresh leg higher in the US Dollar alongside the US Treasury bond yields, pushing GBP/USD to renew three-month lows just below 1.2400.

Pound Sterling found its feet on Friday, as the safe-haven appeal of the US Dollar was dented by China’s stimulus optimism and upbeat economic data. The People’s Bank of China (PBoC) lowered the bank’s Reserve Requirement Ratio (RRR) and the 14-day Reverse Repo rate, in an effort to stimulate the dwindling economic activity while the nation’s Retail Sales and Industrial Production increased more than expected in August.

GBP/USD bounced from a multi-week low of 1.2388 on Friday following mixed US data and profit-taking ahead of the weekend. The US reported that Capacity Utilization rose to 79.7% in August from 79.5% previously, while Industrial Production was up 0.4% against expectations of a 0.1% advance. Additionally, the preliminary estimate of the Michigan Consumer Sentiment Index fell to 67.7 in September from 69.5 in August.

Week ahead: Fed and BoE in spotlight

GBP/USD traders gear up for an eventful week as the Fed and BoE interest rate decisions will be announced alongside a bunch of top-tier economic releases from both sides of the Atlantic.

Making it a quiet start to a critical week, Monday is devoid of any meaningful data from the United States, as well as from the United Kingdom. Thus, Tuesday’s Housing Starts and Building Permits data from the US will be eagerly awaited ahead of key events risks due on Wednesday.

Pound Sterling traders will brace for some volatility on the release of the UK CPI data, which could offer fresh hints on the BoE’s path forward on interest rates. Later that day, the US Fed interest rate decision and Chairman Jerome Powell’s press conference will hog the limelight. The Fed is expected to keep rates on hold but Jerome Powell’s words and the ‘Dot Plot’ chart will be decisive for gauging the next policy move by the Fed, impacting the US Dollar valuations significantly.

On Thursday, the BoE will take center stage as it is set to lift the benchmark interest rate by 25 basis points (bps) to 5.50%. As a rate hike is mostly priced in, the language in the policy statement will be closely scrutinized for the BoE’s future policy path.

From the US docket, the weekly Jobless Claims will be reported on Thursday, followed by the Existing Home Sales data.

Friday will feature the high-impact UK Retail Sales and the preliminary business PMI reports from both the UK and the US, as an eventful week draws to an end for the GBP/USD pair.

GBP/USD: Technical outlook

GBP/USD yielded a close below the critical 200-day Simple Moving Average (SMA) at 1.2433 on Thursday, paving the way for further downside.

The 14-day Relative Strength Index (RSI) is sitting just above the oversold territory, suggesting that there is more room for Pound Sterling sellers.

If they manage to find a strong foothold below the 200-day SMA at 1.2433, GBP/USD could extend the downtrend toward the May 25 low of 1.2308. Ahead of that, the June 5 low of 1.2368 will likely come to the rescue of Pound Sterling buyers.

Conversely, any recovery attempts will need acceptance above the weekly high of 1.2548, above which the descending 21-day SMA at 1.2587 will come into play.  

Fresh buying opportunities will emerge on a firm break of the latter, initiating an uptrend toward the horizontal 100-day SMA at 1.2653. 

GBP/USD sentiment poll

According to the FXStreet Forecast Poll, the GBP/USD pair could recover ground in the upcoming weeks. The pair is seen on average at 1.2455 next week while averaging 1.2735 in the three-month perspective. The number of buyers increases as time goes by, while sellers decrease from 33% in the weekly outlook to 11% in the quarterly one.

 The Overview chart, however, shows unconvinced bulls. The shorter moving average maintains its bearish slope, with most potential targets accumulating below the current level. The monthly moving average turned flat amid a wide dispersion of potential targets. Finally, the quarterly moving average picked up modestly, yet most market participants are looking for a 1.2500/1.2900 range.

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