GBP/USD Week Ahead Forecast: Risking More Protracted Setback

• GBP/USD clutches for support close to multi-year lows
• U.S. yields & USD stage recovery after Fed risk returns 
• Little support for GBP/USD upon any fall below 1.1825
• UK PMIs the highlight for GBP in busy period for USD
• Home sales, GDP & PCE data in focus ahead of Fed

Image © Adobe Images

The Pound to Dollar exchange rate came apart at the seams last week but would sustain deeper losses in the days ahead if a busy U.S. economic calendar or commentary from Federal Reserve (Fed) officials enable U.S. bond yields and the Dollar to build further on a nascent comeback. 

Sterling got no help from better than expected UK economic data and a sharp increase in market expectations for interest rates at the Bank of England (BoE) last week and often appeared to be the most susceptible among major currencies to resurgent U.S. bond yields and a rally by the Dollar.

This was after a chorus of voices from the Federal Reserve rate setting committee reminded the market in public remarks that there is still a risk of the bank opting for a third consecutive 0.75% increase in interest rates next month, reinvigorating U.S. bond yields and the Dollar along the way. 

“What is notable this week is the complete lack of support for the pound in circumstances of the huge move in the rates market. Stronger than expected wage growth on Tuesday, annual CPI breaking above 10% on Wednesday and stronger than expected retail sales data today have all helped fuel this move higher in rates,” says Lee Hardman, a currency analyst at MUFG, writing in a Friday research briefing. 

Above: Pound to Dollar rate shown at 2-hour intervals. 

“The failure of GBP to derive any support at all from this move is telling. There are a number of reasons to possibly explain this and our conclusion is that the outlook does not look favourable with risks GBP/USD will extend a drop beyond our expectations over the coming months,” Hardman added while warning that Sterling could fall as far as 1.15 against the Dollar in the months ahead.

With UK economic figures going overlooked and Sterling’s losses building despite increases in UK bond yields that might ordinarily have been supportive of the currency, this week’s S&P Global PMI surveys may be less important now than the risks emanating from the busy U.S. economic calendar.

Rising U.S. bond yields and the rallying Dollar crimped market risk appetite on Friday and appeared to exacerbate losses for a Pound-Dollar rate, which came close to revisiting multi-year lows beneath 1.18 ahead of the weekend. 

“FOMC Chair Powell is scheduled to speak on Friday (midnight Sydney time). His speech is the first since the FOMC’s policy meeting in late July.  We expect Powell to deliver a hawkish message about inflation in line with recent comments from other FOMC officials. There is scope for market pricing for the Funds rate to shift higher, supporting the USD,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

Above: Pound to Dollar rate shown at 4-hour intervals with Fibonacci retracements of July rebound indicating possible areas of short-term technical support.  

The highlight of the week ahead is Fed Chairman Jerome Powell’s speech at the annual Jackson Holed Symposium on Friday given its capacity to influence market expectations for U.S. interest rates in September and beyond.

However, before then a number of U.S. economic figures are due out and will each help to determine market appetite for the Dollar in the days ahead. 

These include the second estimate of GDP for last quarter and the July reading of the Fed’s preferred gauge of U.S. inflation, the Core PCE Price Index, which markets will scrutinise closely for anything corroborating the signs of moderating inflation pressure recently observed in the official measures.

“We look for the core PCE deflator to have risen by just 0.2% m/m in July (0.180% unrounded), which could lead to a (temporary) downtick in the y/y rate from 4.8% to 4.6%,” says Kevin Cummins, chief U.S. economist at Natwest Markets.

Above: Pound to Dollar rate shown at daily intervals with spread or gap between 02-year UK and U.S. government bond yields. 

“Going into next week, the Jackson Hole symposium on Aug 25-27 will be closely watched – we do not expect a firm commitment to a specific rate path, but rather a broader reminder that additional tightening is needed,” Cummins wrote in a Friday look at the week ahead.

With financial markets recently having downsized expectations for September’s interest rate rise to 0.50% for the Fed, the Pound to Dollar rate would be at risk this week from anything that pushes market pricing back in favour of a larger 0.75% increase.

Likewise with anything that might lead the market to abandon recent bets that the Fed may be quick to cut its interest rate next year.

“Core personal consumption expenditures (PCE) inflation could again signal a moderation in prices. It will be interesting to see if the Fed will strike a less hawkish tone in Jackson Hole based on a couple of relatively soft releases,” says Thomas Flury, an FX strategist at UBS Global Wealth Management.

“The flash PMI releases will offer a glimpse on how the UK economy is holding up. Although short sterling positions are being unwound this week, we see no major moves in GBPUSD until September,” Flury and colleagues wrote in a Friday research briefing.