British Pound Forecast: Bearish
GBP/USD remains trapped in a sideways range
- UK labor market data will provide the next big domestic steer
- Mr. Powell of the Fed is set to speak in the coming week
The British Pound will head into a new trading week at the mercy of a tussle between two clear domestic factors.
News that its home nation exited an unusually short and shallow recession in the first three months of this year has given bulls something to charge at. The United Kingdom’s 0.6% economic expansion in the three months through March was better than analysts had expected.
However, May 9’s monetary policy meeting at the Bank of England ended with rate setters clearly ready to reduce borrowing costs soon, assuming economic data will allow. With two of nine committee members already convinced that lower interest rates are needed now, a June reduction remains very much in play.
This is a headwind for Sterling against the United States Dollar. The Federal Reserve is expected to hold fire at least until September. It might not be such a problem for the Pound against the Euro, however, with Eurozone rates also expected to start falling next month.
With the BoE’s view in mind, traders will look to official UK labor market numbers on Tuesday. They’ll particularly focus on average earnings and their likely pass-through to inflation.
February’s earnings excluding bonuses rose at a rate of 5.6%. The central bank may well want to see this figure coming down before it can feel entirely comfortable with a rate cut.
There are some big numbers out of the US next week too which are likely to see some GBP/USD moves. April’s consumer and producer price data are both on tap. However, the week’s main event could be Fed Chair Jerome Powell’s scheduled speech on Tuesday. Clues on the Fed’s latest thinking are of course gold dust for the markets.
However, assuming the data allow markets to leave interest rate expectations for both Sterling and the Dollar where they are now, with the UK set to cut first, it is hard to see the Pound retaining current altitude. That said the currency is clearly benefitting from better global market risk appetite. This week is likely to hinge on how those two factors play out, but, based on what we can know now, it’s a cautious bear call this week for Sterling.
GBP/USD Technical Analysis
GBP/USD Daily Chart Compiled Using TradingView
The Pound remains within the clear, sideways range within which it broke out of its previously dominant downtrend channel back on May 3.
Support at the first retracement of the rise up to mid-July’s highs from the lows of September 2022 still looks important for this market. It comes in at 1.24874.
Sterling bulls seem to be trying, and so far failing, to build a base form which they can successfully hurdle resistance at both the 50- and 200-day moving averages, both of which are now quite close to the market. They will probably need to make and hold a break above the current range top of 1.25745 to do this.
Retail trade data finds market participants quite evenly split on GBP/USD’s prospects, albeit with a small bullish bias. This may suggest that risk appetite is ruling trade at the moment, rather than bald interest-rate expectations.
--By David Cottle for DailyFX
