GBP/USD Week Ahead Forecast: Correcting Higher if USD Falters Further

• -GBP/USD looks for a footing above 1.20
• -Could face resistance near & above 1.23
• -USD direction, U.S. data key short-term
• -Fed minutes, speakers & job data eyed

Image © David Holt, Accessed: Flikr, Licensing Conditions: Creative Commons

The Pound to Dollar rate tumbled back below 1.20 late last week but was quick to draw a corrective bid from the market and could attempt to reverse more of its recent decline if the greenback extends Friday's retreat from other currencies in the days ahead.

Sterling beat a retreat from a resurgent Dollar from the outset last week and had been harried below the 1.20 level on Friday before the U.S. currency was dealt a setback in June’s Institute for Supply Management Manufacturing PMI.

"Friday’s US ISM manufacturing report showed a big deterioration in the new orders and employment sub-components (both moved into contraction) and while inventories rose to 56.0, the feeling is this isn’t a sign of supply chains easing (equity positive), but a sign that demand is falling," says Chris Weston, chief market strategist at Pepperstone. 

"The prospect of a technical recession is now pretty high, although given the labour market is in rude health, many won’t have felt protracted economic pain. That may, unfortunately, come further out the year and the fact we have 77bp of cuts priced in US rates for 2023 suggests the market sees this as a growing probability," Weston wrote in a Monday research briefing, citing a falling Atlanta Federal Reserve GDP tracker.

Above: U.S. Dollar Index shown at hourly intervals and annotated for recent events. Click image for closer inspection.

The Dollar has not benefited from either Friday’s downside surprise in the ISM manufacturing survey or the Core PCE Price Index, the Federal Reserve’s (Fed) preferred measure of inflation, which stalled for the month of June on Thursday and pulled the annual rate down from 4.9% to 4.7% on the way.

Losses have been racked up by the Pound and gains accrued to the greenback only in between releases of key data while many analysts have attributed this to mounting concerns in the market about the outlook for U.S. and global economic growth. 

"The one economy where growth expectations have already been revised down significantly is the UK. BoE Governor Bailey sounded very cautious on the economy at Sintra, noting that the UK was at a turning point and may well be weakening faster than other countries,” says Paul Robson, Europe head of G10 FX strateg at Natwest Markets.

"It seems a widely held market view already, so there is less scope for such comments to shift sentiment on the currency. GBP/USD continues to trade weakly, against our expectations, although the story this week has been more one of a stronger USD story than independent weakness. With the USD outlook more balanced, we hold to the view that GBP/USD forms a base ~1.20," Robson wrote in a Friday research briefing.

Above: Interbank reference rates and performances for Pound Sterling following Friday’s London close. Source: Netdania Netstation. 

It could also be relevant this week, however, that Friday’s rally was accompanied by persistent co-movements between the GBP/USD and GBP/CNH during the hours up to and after the London close, which is indicative of big bid for the Pound originating in Asia. 

Wherever this persists for more than a moment in GBP/CNH it potentially reflects supervision of the managed-floating Renminbi-Sterling rate by the Peoples’ Bank of China (PBoC); something that Sterling bears would ignore at their own risk.

But much also now likely depends on whether the Dollar continues its Friday retreat from long-term highs against many currencies, which is in turn likely to depend on the market response to a range of events in the U.S. calendar for the days ahead.

“The overall look of the short-term chart is not that encouraging, however, with the pound easily capped in the low 1.23 zone over the past week or little more and support at 1.2170/75 yielding yesterday,” says Juan Manuel Herrera, a strategist at Scotiabank.

Above: Pound to Dollar rate shown at daily intervals with Fibonacci retracements of June, April and January 2022 falls indicating possible short and medium-term areas of technical resistance for Sterling. Click image for closer inspection.

“The drop in US yields supports our contention that the USD is unlikely to rise much further in this cycle, all else remaining equal even if recession concerns may mean that the USD remains supported on dips,” Herrera and colleagues also said on Friday. 

Importantly, a host of policymakers will speak publicly from Wednesday this week when the Fed also releases minutes from the June meeting at which most Federal Open Market Committee members favoured lifting interest rates to a “modestly restrictive” range of between 3% and 3.5% by year-end.

There was also broad support on the FOMC for lifting the Fed Funds rate to four percent or more the next year in order to bring the rate of inflation back to the Fed’s 2% target but financial markets have recently begun to wager that such levels are unlikely to be seen. 

“We will be looking for clues about the indicators that the committee will be weighing in its upcoming July meeting as it deliberates whether to hike 50bp or 75bp, including the sensitivity of the decision to inflation outcomes and the willingness of the committee to consider evidence that tightened conditions are restraining activity,” says Jonathan Millar, deputy chief U.S. economist at Barclays. 

Above: U.S. Dollar Index shown at monthly intervals with selected moving-averages Fibonacci retracements of 2002 downtrend indicating long-term technical resistances. Click image for closer inspection.

The Fed’s outlook is based on the assumption that the U.S. labour market will remain strong even as the bank carries out its fastest and most potent monetary tightening for decades, which is why this Friday’s non-farm payrolls report is likely to be scrutinised extra closely by the market. 

However, before then BoE Governor Bailey unveils the latest Financial Stability Report on Tuesday while Monetary Policy Committee members Silvana Tenreyro, Catherine Mann are scheduled to speak about monetary policy topics on Tuesday and Wednesday. 

“The UK economic outlook is very poor. This week GBP/USD is likely to take direction from the USD in the absence of important UK economic data. There is downside support for GBP/USD at 1.1934,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia. 

“USD can lift this week because financial markets remain focused on the risk of a sharp slowdown in the global economy.  Wednesday’s FOMC meeting minutes may give insights on the trade-off between bringing inflation down to target and the risk of recession. We expect the FOMC to focus on inflation even if the risk of recession increases,” Capurso and colleagues warned on Monday. 

Above: Pound to Dollar rate shown at weekly intervals with Fibonacci retracements of March and September 2020 recoveries indicating possible medium-term areas of technical support for Sterling. Click image for closer inspection.