GBP/USD Week Ahead Forecast: Cocktail of Risk Invites Higher Volatility
- Written by: James Skinner
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- GBP/USD faces resistance near 1.2302, 1.2451 & 1.2505
- Technical support possible near 1.2115, 1.2064 & 1.2009
- Data deluge risks volatility ahead of Fed & BoE decisions
- UK GDP, employment & inflation data eyed ahead of BoE
- U.S. CPI data posing two-way risk ahead of Fed decision
© Bank of England
The Pound to Dollar exchange rate has remained near nine month highs in recent trade but could be volatile this week as a deluge of important UK and U.S. economic data sets the stage for interest rate decisions from the Federal Reserve (Fed) and Bank of England (BoE).
Dollars have been sold heavily to benefit of Sterling and others since early November when official figures suggested U.S. inflation had ebbed notably in October but whether this trend can persist into year-end will depend in no small part on data and decisions set to be released over the coming days.
"While we are confident that the USD has now peaked alongside US inflation, and expect both to weaken further in year ahead, there is a material risk that the upcoming US CPI and FOMC meetings could trigger a USD short squeeze," says Lee Hardman, a currency analyst at MUFG.
"A stronger core inflation reading would be the most disruptive outcome for markets," Hardman and colleagues write in a Friday research briefing.
Tuesday's U.S. inflation figures for November are the most important this week because of their potential to impact Fed policymakers' judgements about just how much further interest rates will need to be lifted up ahead, a detail that will be communicated through new forecasts announced on Wednesday.
Above: GBP/USD at daily intervals with Fibonacci retracements of June 2021, March 2022 and April 2022 declines indicating possible areas of technical resistance for Sterling. Click image for closer inspection.
Friday's producer price index data warned of upside risks to an economist consensus that looks for a 0.3% November increase in consumer price inflation and an annual rate of inflation that falls from 7.7% to 7.3%, although the core inflation number is likely to matter more.
The latter overlooks changes in energy and food costs so is thought to be a better reflection of domestically generated inflation pressure while the economist consensus suggests it likely rose at an unchanged pace of 0.3% in November and by 6.1% for the year to the end of November.
"While October inflation data received so far showed a welcome surprise to the downside, these are a single month's data, which followed upside surprises over the previous two months," Fed Chair Jerome Powell said in a recent speech.
"Down months in the data have often been followed by renewed increases. It will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains much too high," he added.
Tuesday's inflation data and Wednesday's Fed decision are bookended on either side by a deluge of data from the UK on Monday and Tuesday as well as an interest rate decision from the Bank of England on Thursday.
Above: Pound to Dollar rate shown at daily intervals with Fibonacci retracements of rallies beginning in October and November indicating possible areas of technical support for Sterling alongside selected moving-averages. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.
"With the Funds rate at very restrictive levels, we expect Powell at his press conference to talk about the risks to economic growth as well as the need to bring inflation down to target. A greater consideration to economic growth would be welcomed by risk assets and pull the USD down in our view," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.
Monday's GDP data and Tuesday's employment figures will provide important insight into the likely performance of the UK economy over the coming months.
However, they might not do much on their own to influence the outlook for Bank of England interest rate policy with this depending much more on the inflation data out this Wednesday and in the months after.
The BoE currently projects a significant decline from 11.1% in October to 5.2% by the final quarter of next year and a below-target 1.4% at the end of 2024.
The extent to which inflation is expected to fall back over the coming years has been a key driver of the BoE's regular warnings to markets that they are expecting too much when betting that Bank Rate is likely to rise to almost five percent during the opening half of next year.
"We expect the BoE to stress again that market pricing is too aggressive. The degree to which markets take heed of the BoE’s warning will influence how far (or not) GBP falls on the day," CBA's Capurso and colleagues say.
Above: Pound to Dollar rate shown at weekly intervals with Fibonacci retracements of June 2021, March 2022 and April 2022 declines indicating possible areas of technical resistance for Sterling alongside selected moving-averages. Click image for closer inspection.
