GBP/USD Week Ahead Forecast: Looking to Cement Grip On 1.10

• GBP/USD looks to establish better foothold near 1.10 
• With U.S. data, Renminbi trend & BoE policy in focus 
• GBP/USD may benefit from steadier RMB short-term
• But risk of U.S. CPI bolstering USD & burdening GBP 
• BoE speeches, UK employment & GDP also in focus  

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The Pound to Dollar rate has drawn a line under its late September losses and could now look to cement its grip on the recently recovered 1.10 level this week but will be sensitive along the way to the trajectory of the Renminbi and a series of important economic data releases from the UK and U.S. 

Sterling rose notably against many currencies during the opening half of last week, leading GBP/USD to recover to almost the 1.15 level on the Tuesday only for it to ebb lower as the U.S. Dollar made a comeback ahead of the weekend. 

Dollars had been sold widely early on last week but were bought ahead of the weekend with demand seemingly encouraged by better-than-expected U.S. data including Wednesday's Institute for Supply Management Services PMI and Friday's non-farm payrolls report for September.

"We continue to see little in the data flow that would seriously undermine the FOMC's intention to continue with aggressive hikes in November (+75bp) and December (+50bp)," says Jonathan Millar, a senior U.S. economist at Barclays. 

"Indeed, with communications consistently signalling participants' preference for a 75bp hike in November, we see only a remote possibility that even an unexpectedly soft CPI print next week would alter these plans," Millar and colleagues wrote in a Friday look at the week ahead. 

Above: Pound to Dollar rate shown at hourly intervals with Fibonacci retracements of late September recovery indicating possible areas of short-term technical support for Sterling and shown alongside upside down Dollar Index and USD/CNH exchange rate. Cick image for closer inspection. 

Recent data has continued to cast the U.S. job market and overall economy in a resilient light while doing nothing to deter Federal Reserve (Fed) policymakers from the more hawkish interest rate stance adopted in September, which has been a major source of support for the Dollar during recent weeks.

This has also been a headwind for the Pound and one that could limit its ability to recover further in the days ahead if this week's data including Thursday's release of September's inflation figures vindicates the bank for its increasingly aggressive effort to bring down U.S. inflation. 

"We expect the US core CPI to beat consensus expectations again. The US’ ongoing high inflation will encourage FOMC members to keep hiking aggressively and support further gains in the USD," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia. 

"GBP/USD can weaken further this week for two reasons. First, we expect the USD to lift because US inflation can reinforce that the FOMC will not pivot on rate rises soon. Second, domestic data will reinforce that the UK economy is slowing," Capurso and colleagues said in a Monday research briefing.

Thursday's inflation figures are the highlight of the U.S. calendar this week but Wednesday's minutes from September's Fed meeting and Friday's publication of September retail sales figures will also be scrutinised closely by the market too. 

These are all interspersed with public appearances from multiple Fed officials. 

Above: Pound to Dollar rate shown at daily intervals with Fibonacci retracements of late September recovery indicating possible areas of short-term technical support for Sterling. Cick image for closer inspection. 

U.S. economic data will be important in determining market appetite for the Dollar and the Pound, although the trajectory of the Renminbi may also be an important influence on many currencies as China's financial markets reopen following the Golden Week holiday. 

This is in part because of reports suggesting that state banks had been tasked with intervening to support the Renminbi against the Dollar ahead of the Golden Week holiday, and given that there is a highly important political event coming up in the local calendar on October 16.

"The highly anticipated Chinese Communist Party Congress commences on Sunday. The Congress may move currencies significantly next week and beyond. AUD/CNHmay surge if the Chinese government softens its zero covid policy by more than we expect," CBA's Capurso said on Monday. 

To the extent that there is any continuing preference in Beijing to ensure stability in the Renminbi during the lead-up to the party congress, any intervention toward this end would likely be highly supportive of other currencies too including Sterling, which has a strong positive correlation with the Renminbi.

However, the Pound will also have to navigate a busy schedule of domestic event risk too including numerous speeches from members of the Bank of England (BoE) Monetary Policy Committee as well as the release of employment and GDP figures for August.

Above: Dollar Index shown at daily intervals with USD/GBP and USD/CNH exchange rate. Cick image for closer inspection. 

Tuesday's employment figures and Wednesday's release of GDP data for August are the economic highlights of the week in the UK but most important for the Pound is likely to be the scheduled speeches from Bank of England Monetary Policy Committee members.

These are likely to be of most interest to the market following the financial fallout over the new government's budget, which has been widely criticised in recent weeks and was followed in late September by heavy losses for the Pound and steep increases in government bond yields.

September's budget also saw market-implied measures of expectations for interest rates rise signifantly to imply a high probability of Bank Rate being lifted from 2.25% currently to more than 5% by the early months of the new year in what would likely be a very damaging policy outcome for the UK economy.

What the BoE makes of the market's assumptions about Bank Rate is likely to be an important influence on the Pound for months to come, hence why this week's speeches from members of the MPC will be scrutinised closely. 

These include a Tuesday appearance by Governor Andrew Bailey at the Institute of International Finance Annual Membership Meeting in Washington and a Wednesday address by chief economist Huw Pill to the Scottish Council for Development and Industry.