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British Pound (GBP) Forecast: 50bps Rate Hike Off the Table as UK Unemployment Rises?

British Pound (GBP) Forecast: 50bps Rate Hike Off the Table as UK Unemployment Rises?

Warren Venketas, Analyst

POUND STERLING TALKING POINTS

  • Weakening UK labor market.
  • Upcoming Federal Reserve and BoE Rate decisions.
  • Key cable support looks vulnerable.
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GBP/USD FUNDAMENTAL BACKDROP

Earlier this morning, UK jobs data was released with employment change for March beating estimates while the unemployment statistic missed (see calendar below). Wage growth via average earnings also missed forecasts adding support to the less hawkish bias. Initial reaction saw the pound weaken against the greenback after an ease in the labor market could be the start of an economic shift. Later today, U.S. PPI will close off the event list before tomorrow’s key FOMC rate decision.

EUR/GBP ECONOMIC CALENDAR

economic calendar

Source: DailyFX Economic Calendar

While there is much talk around a possible 75bps hike from the Fed, a 50bps jump could dampen dollar strength while the Bank of England (BoE) may be skewed towards the 25bps jump as opposed to the possibility of 50bps prior to today’s unemployment figure. The previous BoE announcement saw three officials vote for a 50bps hike and could remain the same this time around however, a majority vote for half a percentage point is unlikely in my opinion and would really come as a surprise.

BOE IMPLIED RATE PROBABILITIES

bank of england BoE rate decision

Source: Refinitiv

TECHNICAL ANALYSIS

GBP/USD DAILY CHART

gbpusd daily chart

Chart prepared by Warren Venketas, IG

Daily GBP/USD price action shows bears testing the key area of confluence around the 76.4% Fibonacci at 1.2080 (red) for the second time this year. A confirmed candle close below this level should open up further room for additional downside towards the March 2020 swing low at 1.1410. The current economic backdrop definitely points to this bearish continuation however technical signs are displaying some bullish divergence between the RSI and cable price action. The RSI suggests slowing downward momentum while prices are printing lower lows. Traditionally, bullish divergence points to impending upside however timings can be ambiguous. I would be extremely cautious around trading against this strong downside move but we have to consider the central bank deviation between the two nations and favor the greenback.

Key resistance levels:

  • 1.2400

Key support levels:

  • 1.2080
  • 1.1410

BEARISH IG CLIENT SENTIMENT

IG Client Sentiment Data (IGCS) shows retail traders are currently LONG on GBP/USD, with 77% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a downside bias.

Contact and follow Warren on Twitter: @WVenketas

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

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