GBP/USD Weekly Forecast: Will Pound Sterling sellers retain control?

GBP/USD ended the first week of 2023 on a negative note, as the 1.2000 threshold gave way amid a resumption of the latest downtrend. The US Dollar bulls jumped back into the game amid the revival of the hawkish US Federal Reserve (Fed) expectations. Will the US Dollar maintain the upper hand in the US Consumer Price Index (CPI) week ahead?  

GBP/USD sold off into the US Dollar comeback

Following a week of temporary reprieve, GBP/USD lost nearly 200 pips in the first week of 2023, as Pound Sterling bulls gave up control amid a solid comeback staged by the US Dollar across its major rivals. An observed New Year holiday in the United Kingdom and the United States on Monday made up for a holiday-shortened week, dominated by top-tier US economic releases in the second half. The Fed interest rate hike expectations, risks of a potential global recession and concerns about China’s economic recovery dominated risk sentiment and influenced the dynamics of the US Dollar, eventually impacting the GBP/USD pair.

Improvement in the components of the US ISM Manufacturing survey and strong ADP Employment data bolstered expectations that the Federal Reserve could keep interest rates at higher levels for longer, which sapped risk appetite and boosted the demand for the US Dollar.

The US Treasury yields also found a floor at weekly troughs amid hawkish Fed bets, further helped by the Minutes of the December Federal Open Market Committee (FOMC) Meeting. The FOMC Minutes underscored policymakers’ resolve to fight inflation, cautioning that an “unwarranted" loosening of financial conditions would hurt their efforts to achieve price stability. In response to these factors, the US Dollar Index recaptured the 105.00 level while the benchmark 10-year US Treasury bond yields climbed back above the 3.70% mark.

Meanwhile, the continuation of contraction in China’s manufacturing and services sector, in the face of the covid containments, raised concerns over its economic recovery, which amplified risks of a potential recession worldwide. China worries kept investors unnerved, boding well for the safe-haven US Dollar.

However, the US Dollar struggled to extend its upbeat momentum following the release of the encouraging US Nonfarm Payrolls on Friday. Meanwhile, the US Treasury yields sustained the upside after the headline Nonfarm Payrolls rose by 223K in December vs. 200K expected and 256K previous. The United States Unemployment Rate arrived at 3.5% in the reported month, down from 3.6% booked in November. The Labor Force Participation Rate rose slightly to 62.3% from 62.2%.

On the other side, the Pound Sterling remained undermined by ongoing economic problems, with rail strikes in the United Kingdom extending into the new year. UK rail staff disrupted the New Year return to work on Tuesday in the latest strike action by workers amidst the worsening cost-of-living crisis in decades. In the final weeks of 2022, thousands of British ambulance workers went on strikes in an escalating dispute over pay and staffing. In response, the UK government on Thursday mulled the prospect of public-sector pay hikes next year in an attempt to end strikes by nurses and ambulance staff that have piled pressure on an already overburdened health system.

Week ahead: All eyes on US Consumer Price Index

With fundamentals back on tap for market participants, all eyes are now turned toward the US Consumer Price Index (CPI) due for release next Thursday. The US inflation data will shape up the tone for markets in the coming weeks.

Ahead of that highly-influential macro data, Cable traders will watch out for Tuesday’s speech by the US Federal Reserve President Jerome Powell amid a relatively data-quiet Monday. Wednesday also lacks significant market-moving events from both sides of the Atlantic.

The United Kingdom's monthly Gross Domestic Product (GDP) and Industrial Production data will be reported on Friday, making up for a relatively light British calendar. The United States will also see the releases of the Preliminary University of Michigan (UoM) Consumer Sentiment and Inflation Expectations data.

The Federal Reserve expectations-led broader market sentiment will continue to play a pivotal role in the GBP/USD price action while speeches from Fed policymakers will be also closely scrutinized for fresh hints on the central bank’s policy path. 

GBP/USD: Technical outlook

GBP/USD: Daily chart

Having staged a tepid recovery from the two-month low at 1.1841 on Friday, GBP/USD still closed the week below the upward-sloping 50-Day Moving Average (DMA) at 1.1953.

Daily closing below the mildly bearish 200DMA, earlier in the week, confirmed the negative bias in the currency pair, exposing the downside toward the horizontal 100DMA at 1.1688.

Ahead of that level, the horizontal (dashed) trendline support at 1.1768 could challenge the bearish commitments if the monthly low gives way.

The 14-day Relative Strength Index (RSI) is lying below the midline, adding credence to the bearish potential.

On the flip side, the GBP/USD pair will need to recapture the 50DMA resistance to attempt a retest of the critical 200DMA support now turned resistance. Acceptance above the latter could negate the bearish pressure in the near term.

The Pound Sterling bulls will then regain momentum, targeting the downward-pointing 21DMA at 1.2108. The next upside hurdle is envisioned at the December 19 high of 1.2242. 

GBP/USD sentiment poll

According to the FXStreet Forecast Poll,  GBP/USD has no room for a comeback. The pair is seen hovering just above 1.1900 in the nearest perspective, while bearish in the one-month view. On average, market experts expect the pair to trade at around 1.1652. The neutral tone persists in time, as most analysts don’t expect relevant moves in the quarterly view, with the pair seen then averaging 1.1775. It is worth adding that in the monthly and quarterly views, bears outpace bulls.

In the Overview chart, moving averages paint a gloomy picture for GBP/USD. The shorter one gains bearish momentum, while the rest remain directionless. One thing that seems relevant is that higher lows are seen in the wider perspective, somehow suggesting bears are unwilling to push the pair below the psychological 1.1000 figure.