GBP/USD Weekly Forecast: Sterling’s fall looks exhausted at 14-month low
- The GBP/USD marked another week of falling lower hitting the fresh 14-month low of 1.2666 on Wednesday just to rebound to 1.2700 area.
- The trinity of important UK macro releases did not support Sterling even as labor market proved strong and retail sales jumped way above expectations.
- With market showing no mercy with Sterling, technically the move lower looks exhausted with both Relative Strength Index and Slow Stochastics in the oversold territory.
- The FXStreet Forecast Poll sees GBP/USD dropping further near term to 1.2705 with last week's forecast error reaching fantastic 0.3% only.
Sterling showed little volatility on the weekly basis after opening at 1.2742 on Monday and about to close the third week of August near 1.2700 as relatively solid macroeconomic data were outperformed by the ongoing emerging market liquidity squeeze that saw investors flying to safety with US Dollar rising in value across the board.
Although Sterling moved within 1.2% range representing 160 pips difference between last weeks high of 1.2826 and low of 1.2666, the overall trend on Sterling remained bearish even with the economic fundamentals standing on the strong side in the UK.
The ongoing emerging market crisis and the selloff on Turkish Lira at the beginning of the week saw market sentiment turning increasingly Risk-off, with fundamentals having little-to-no effect on the market.
The GBP/USD slid to a 14-month low of 1.2666 on Wednesday and only the news of China and the US meeting later in August to discuss hot trade issues helped to stabilize the situation with US Dollar retreating slightly lower. On the top of it, the news of the US pressing Chinese officials to lift Yuan during the talks also contributed to stabilization.
On the data front, the third week of August saw a solid labor market report for July with the unemployment rate in the UK dropping to 4.0%, the lowest level since February 1975, while wages rose 2.7% over the year in three months to June period, confirming the previous reading.
While headline inflation in the UK accelerated n line with market expectations to 2.5% over the year in July, the core inflation stripping the consumer basket off food and energy prices remained stagnant at 1.9% y/y in July.
UK wages and inflation since 2002
Source: ONS, Chart: FXStreet
The most surprising piece of macro data came out on Thursday with the UK retail sales surprising strongly on the upside. The UK retail sales rose 0.7% in July after falling -0.5% m/m in June while core retail sales excluding motor fuel sales rose 0.9% in July after falling -0.6% m/m in June. Over the year, total retail sales accelerated to 3.5% y/y in July while core retail sales increased 3.7% y/y.
With lack of important macro data due in the week of August 20-24 and central bankers symposium in Jackson Hole, Wyoming starting next Thursday, the GBP/USD currency pair is destined to follow the patterns of market sentiment driven by external factors.
Technically, Sterling is still trapped in the downward sloping trend channel and as the currency pair broke below 1.2755 representing 100% retracement of the move from 1.2755 to a cyclical high of 1.4377 reached on April 12 this year, the new low of below 1.2666 is the next target. On the daily chart, the technical oscillators look exhausted with both the Relative Strength Index and Slow Stochastics deeply in oversold territory and Momentum already pointing higher in favor of the technical correction. After reaching the near-term target at 1.2680 representing 23.6% Fibonacci retracement of the post-Brexit slump from 1.5020 to 1.1940. The GBP/USD is facing immediate resistance on the upside at 1.2755 with a break above 1.2755 seen testing 1.2800.
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Technical analysis
GBP/USD daily chart
The GBP/USD opened the third week of August at 1.2742 on the daily chart with the downtrend dampening the spot rate to a low of 1.2666 on Wednesday as the emerging market crisis led to extremely volatile Turkish Lira trading with market sentiment turning to Risk-off mood supporting the flight to safety with the US Dollar among main beneficiaries. Technical oscillators like the Relative Strength Index and Slow Stochastics moved to the oversold territory regardless of solid economic fundamentals in the UK during the third week of August. With Momentum turning upside on Friday as the spot rate of Sterling returned back above 1.2700 level, next move on the downside looks limited and it should bring a technical correction for Sterling higher. The GBP/USD is facing immediate resistance on the upside at 1.2755 with a break above 1.2755 seen testing 1.2800.
Economic fundamentals in the week ahead
The UK economic calendar is featuring only lower tier economic indicators with the UK public sector finances report due on Tuesday pretty much the headline of the upcoming week.
With the UK parliament on vacations until September 4th, the market sentiment and Brexit-related news are set to drive the market.
UK economic calendar for August 20-24
On the other side of the Atlantic, the fourth week of August is set to deliver FOMC meeting minutes and the speeches from various central bankers worldwide at the Jackson Hole symposium in Wyoming.
On the data front, the US housing market data are due and the US durable goods orders report due next Friday with core orders up 0.3% m/m in July.
Forecast for the next week
The FXStreet Forecast Poll for the week ahead stays bearish for Sterling estimating the exchange rate of GBP/USD at 1.2705, down from 1.2774 last week and 1.2947 estimated two weeks ago. With the GBP/USD spot rate at around 1.2735 at the time of finishing this report on Friday afternoon in Barcelona, the FXStreet Forecast Poll showed only 0.3% forecast error, which is, in fact, fantastic result even for a short-term forecast.
While bullish versus bearish predictions distributed 40% of bullish versus 60% of bearish predictions among forecasters participating at the FXStreet Forecast Poll this week, the last forecast for the third week of August expected spot rate to fall to 1.2774 with only 23% of bullish versus 54% of bearish predictions for the week ahead. While it was increasing Brexit uncertainty weighed heavily on Sterling previously, the third week of August saw liquidity crisis and flight to safety ruling the market with US Dollar benefitting strongly.
The FXStreet Forecast Poll sees GBP/USD at 1.2882 in one month time from now, compared to 1.2928 projected last week, 1.3171 two weeks ago and compared to 1.3021 three weeks ago.
The same bearish turn is seen in predictions for three months time from now, with FXStreet Forecast Poll forecasting GBP/USD at 1.2940 in three months time from now compared to 1.3010 last week, 1.3064 forecasted two weeks ago and 1.3195 predicted three weeks ago.
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Author
Mario Blascak, PhD
Independent Analyst
Dr. Mário Blaščák worked in professional finance and banking for 15 years before moving to journalism. While working for Austrian and German banks, he specialized in covering markets and macroeconomics.
