GBP/USD Weekly Forecast: Pound Sterling targets 1.2750 on the road to recovery

Pound Sterling defied the bearish pressures and rebounded firmly as the US Dollar bulls gave in to the market’s pricing of the US Federal Reserve (Fed) interest rates outlook. GBP/USD snapped its three-week corrective downside, with investors now awaiting fresh catalysts for a sustained recovery amid a relatively data-light week ahead on both sides of the Atlantic.

GBP/USD: What happened last week?

The GBP/USD pair remained at the mercy of the dynamics surrounding the United States Dollar, which were heavily influenced by the yo-yo-ing market’s pricing of the Federal Reserve’s move on the interest rates this month. Kicking off the week, the hawkish Fed commentary and a slew of strong United States economic data bumped up a 25 basis points (bps) June Fed rate hike bets to about 62%, helping the US Dollar renew two-month highs across its major counterparts while limiting GBP/USD’s upside near mid-1.2400s. The agreement between US President Joe Biden and House Speaker Kevin McCarthy over the suspension of the US debt ceiling also justified the initial strength in the Greenback.

Heading toward mid-week, however, the tide turned against the US Dollar buyers, as expectations for a June Fed rate hike pause returned to the table following dovish comments from Fed policymakers. Philadelphia Federal Reserve Bank President Patrick Harker favored a pause at the next meeting. In a similar tone, Fed Governor Philip Jefferson said that pausing rate hikes at the next FOMC meeting would give time to analyze more data before making a decision about the extent of additional tightening.

Further, a contraction in the US ISM Manufacturing PMI combined with a dip in the US Conference Board Consumer Confidence and a decline in the Unit Labor Cost Index outweighed stronger-than-expected ADP employment data, bolstering the Fed pause bets. The ADP reported that the US private sector employment increased by a seasonally adjusted 278,000 for the month versus expectations for a 170,000 increase. The US ISM Manufacturing PMI and its sub-components showed a contraction in May, except for the Employment Index. The quarterly United Labor Costs, which is closely watched by the Fed, declined 4.2% vs. 6.0% expected and 6.3% previous.

Markets capitalized on the upbeat mood underpinned by strong Chinese Caixin Manufacturing PMI data and the Congressional approval of the US debt-ceiling suspension, exacerbating the pain in the US Dollar. The extended US Dollar correction sent GBP/USD back above the 1.2500 threshold.

On the Pound Sterling-side of the equation, Bank of England (BoE) Monetary Policy Committee member Catherine Mann spoke mid-week, which failed to move the needle around Cable. Mann said, “the gap between the headline and core inflation in the UK is more persistent than in the US and the Euro area.” Meanwhile, there were no meaningful economic releases from the United Kingdom, as GBP/USD traders relied on the US fundamentals for fresh trading incentives.

The US Bureau of Labor Statistics announced on Friday that Nonfarm Payrolls rose 339,000 in May, surpassing the market forecast of 190,000 by a wide margin. On a negative note, the Unemployment Rate edged higher to 3.7% from 3.4% in April. Nevertheless, the USD managed to stage a rebound ahead of the weekend and capped GBP/USD’s upside.

Week ahead: Calm before the storm 

Following a holiday-shortened week, Pound Sterling traders gear up for a full week, although a relatively light one, data-wise. The US Federal Reserve enters its ‘blackout period’ ahead of the June 13-14 monetary policy meeting, offering some calm to the markets after a busy Nonfarm Payrolls week.

The week kicks off with the final Services PMI report from the United Kingdom on Monday, while the US ISM Services PMI and Factory Orders data will feature in the United States docket. Tuesday lacks any top-tier economic data releases for the GBP/USD traders and, therefore, the focus shifts toward Wednesday’s trade figures from China as well as the US. These data, however, are unlikely to have any significant impact on the market sentiment.

The weekly Jobless Claims from the United States will be the only relevant macro data due for release on Thursday. Friday is absolutely data-dry on both sides of the Atlantic. Still, China’s inflation data could affect risk traders, eventually influencing the higher-yielding Pound Sterling.

In the absence of significant macro data, the broader market sentiment will remain at the mercy of the Fed interest rates expectations and China’s economic worries, especially after the US Congress passed the debt deal to avert a US default.

GBP/USD: Technical outlook

As observed on the daily chart, GBP/USD confirmed a falling wedge breakout after closing Tuesday above the descending trendline resistance, then at 1.2382.

With the upside break, Pound Sterling buyers drove the pair through the key daily moving averages (DMA), the bullish 50 DMA and the bearish 21 DMA, to recapture the 1.2500 mark.

The 14-day Relative Strength Index (RSI) has pierced through the midline and holds comfortably above it, suggesting that there is more recovery in store for the GBP/USD pair.

The next relevant upside barrier is seen at the May 9 low of 1.2578, above which British Pound bulls will likely take out the 1.2600 round figure on their way to mid-1.2600s.

Further up, the May high at 1.2680 could be put to test. Acceptance above the latter will open the door to the pattern target measured at 1.2754.

Conversely, any correction from almost three-week highs could find immediate support at the bearish 21 DMA at 1.2474, below which the 50 DMA at 1.2454 will be challenged.

Pound Sterling sellers could aim for the weekly low near 1.2325 should the corrective downside gather steam. At that level, the falling wedge resistance-turned-support aligns, making it a strong cushion.

The last line of defense for bulls is seen just above 1.2300, where the monthly low coincides with the mildly bullish 100 DMA.

GBP/USD: Forecast poll

FXStreet Forecast Poll fails to point to a consensus among experts about GBP/USD next short-term direction. Average targets on the one-week and one-month outlooks both align at around 1.2450.