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GBP/USD Forecast: Rebound Vulnerable to Stagnant U.K. Wage Growth

GBP/USD Forecast: Rebound Vulnerable to Stagnant U.K. Wage Growth

David Song,
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British Pound Talking Points

GBP/USD appears to be stuck in a narrow range amid the uncertainty surrounding Brexit proposal, and fresh data prints coming out of the U.K. economy may continue to sap the appeal of the British Pound as the updates to the employment report are anticipated to show a mixed outlook the labor market.

Image of daily change for major currencies

GBP/USD Forecast: Rebound Vulnerable to Stagnant U.K. Wage Growth

Image of daily change for GBPUSD

Even though U.K. job growth is projected to increase another 115K during the three-months through May, Average Weekly Earnings are supposed to hold steady at 2.5% per annum, while Average Weekly Earnings excluding bonuses are expected to narrow to 2.7% from 2.8%.

Signs of stagnant wage growth is likely to drag on the British Pound as it encourages the Bank of England (BoE) to delay its hiking-cycle, and the majority of the BoE may vote in favor of keeping the benchmark interest rate on hold at the next meeting on August 2 as especially as ‘inflation continued to fall back gradually as the effects of sterling’s past depreciation faded.’

As a result, the U.K. Consumer Price Index (CPI) on tap for later this week may also impact the pound-dollar exchange rate as the core rate of inflation is expected to hold steady at 2.1% per annum in June, and a batch of lackluster data prints may rattle the recent rebound in GBP/USD as it dampens bets for an imminent BoE rate-hike.

Image of IG Client Sentiment for GBPUSD

Keep in mind, the IG Client Sentimentreport shows retail traders have remained net-longsince April 20 when GBP/USD traded near the 1.4090 zone even though price has moved 6.1% lower since then. In addition, 67.4% of traders are still net-long as the ratio of traders long to short sits at 2.06 to 1, but market interest appears to be waning ahead of the key U.K. data prints as the number of traders net-long is 2.9% lower than yesterday and 7.8% lower from last week, while the number of traders net-short is 9.4% lower than yesterday and 9.3% lower from last week.

With that said, the broader outlook for GBP/USD remains tilted to the downside especially as the Relative Strength Index (RSI) continues to track the bearish formation from earlier this year, but the exchange rate stands at risk of facing range-bound conditions as it snaps the series of lower highs & lows from the previous week.

GBP/USD Daily Chart

Image of GBPUSD daily chart
  • Monthly range remains in focus for GBP/USD followed the failed attempt to test the June-high (1.3473), with the near-term outlook capped by the 1.3370 (78.6% expansion) hurdle.
  • Lack of momentum to retain the recent series of lower highs & lows may continue to foster range-bound conditions, with the 1.3090 (38.2% retracement) region on the radar as it largely lines up with the monthly-low (1.3095).
  • Need a break/close below the stated region to bring the downside targets back on the radar, with the first region of interest coming in around 1.2950 (23.6% expansion) followed by the 1.2800 (50% expansion) handle.

For more in-depth analysis, check out the Q3 Forecast for the British Pound

Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.