Pound-Dollar Near-term Forecast: Close Above 1.4250 Required to Ignite Further Buying Interest

- GBP/USD unable to break 1.42
- 1.4250 is the key objective
- U.S. inflation data key this week
- GBP struggles as June 21 set to be delayed

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• GBP/USD reference rates at publication:
• Spot: 1.4120
• Bank transfers (indicative guide): 1.3730-1.3828
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The British Pound continues to knock its head against a significant resistance level against the Dollar, a break of which is required to reignite the buying interest required to propel GBP/USD to new multi-year highs.

Looking ahead to the coming week, the Pound-to-Dollar exchange rate (GBP/USD) will likely take a steer from U.S. inflation data due Wednesday and ongoing anxieties as to whether the UK will finally lift all Covid-19 restrictions on June 21.

GBP/USD remains above 1.41 at 1.4127 the time of publication, although it had gone as high as 1.42 on the previous Friday.

The U.S. Dollar retreated against the Euro, Pound and other major currencies following the release of a softer-than-expected set of labour market statistics out of the United States on Friday.

But there is a clear sense that the market is unable to follow up on any selling of the Dollar in the current environment, which will frustrate those looking for a stronger Pound.

"The sharp rally on Friday has neutralised the immediate outlook. However only a close above the 1.4250 level will restore upside pressure. Above here will target the 1.4377 the 2018 high," says Karen Jones, Head of FICC Technical Analysis at Commerzbank.

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U.S. economic data is a primary driver of the Dollar at the present time as it informs market expectations as to whether or not the Federal Reserve will finally start reducing its quantitative easing programme.

The 'tapering' of quantitative easing at some point in 2021 would signal to the markets that a rate rise is due in 2022 at some point, a development broadly supportive of the Dollar.

For the Fed to take this 'Dollar supportive' step they would need to see strong employment gains combined with strong inflation.

Inflation is certainly rising fast, but employment is proving more frustrating, as evidenced by the disappointing payroll numbers out on Friday.

The U.S. non-farm payroll May edition revealed the economy created 559K jobs, more than the 278K created in April but less than the 650K markets expected.

But what of inflation?

"We expect the dollar to remain gently offered next week, when May inflation numbers in the US may come in at 4.8% and further dampen the USD real rate," says Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING Bank.

ING's economists look for headline and core inflation to jump to 4.8% and 3.3% year-on-year respectively.

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But they say this could represent the peak in the inflation jump as peak base and bottleneck effects might be seen in these figures.

"Last month FX and Rates markets looked through the jump in inflation and we suspect the same may be true this month. In effect the combination of higher US inflation and a Fed prepared to do little about it is a negative environment for the dollar," says Turner.

Should inflation disappoint and result in Dollar losses, GBP/USD could once more test 1.42.

But as noted by Jones, 1.4250 is that crucial level to watch and failure to break above here could open the door to more noticeable GBP/USD weakness.

"Should 1.4250 hold it is possible that 1.4090/80 will be retested. Failure here should re-focus attention on to nearby support at 1.4000/18," says Jones.

For now the Pound leg of the Pound-Dollar exchange rate might not offer much upside support, leaving any real moves dependent on the Dollar.

Sterling has started the week in soft fashion amidst heightened concerns the UK government will delay the full easing of Covid-19 restrictions in light of rising cases.

The UK's covid case rate has risen amidst the prevalence of the more transmissible 'Indian' strain of Covid-19 which now accounts for the majority of new cases in the country.

"A cause for concern is the development in Great Britain, where the infection figures have been rising again since mid-May, although almost 60% of the population has now received at least one vaccination," says Bernd Weidensteiner, Senior Economist at Commerzbank.

"Currently, the delta variant of the virus, which was first detected in India and spreads much more easily than the original virus, dominates the infection incidence. The number of new Corona patients admitted to hospitals is also tending to increase slightly. This could delay the planned lifting of the still existing Corona restrictions," adds Weidensteiner.

When Prime Minister Boris Johnson first announced plans to exit lockdown he described the process as irreversible, but with cases on the rise once more it appears the government will in fact not go ahead with the final step of easing, due on June 21.

The Government is "absolutely open" to delaying the June 21 unlocking, said Health Secretary Matt Hancock, in the strongest indication yet that the date for the next step in the roadmap could be put back.

Media are reporting a two-week delay until July 5 has been under discussion by scientists and civil servants, and Hancock's remarks confirmed that pushing back the relaxation of restrictions was being considered.

Any delay to unlocking risks undermining confidence in the UK economic rebound, which has been a foundation of Sterling's solid performance in 2021 thus far.

The Pound could struggle to find form amidst the dour narrative regarding fully reopening the economy.

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