GBP to USD Outlook: Analyst Views On The Next Move
The Pound (GBP) began last week on a subdued note, as the downbeat economic releases from the previous week continued to weigh on Sterling, alongside the short supply of data.
The directionless trade continued through Tuesday’s session, though Sterling was able to make small gains due to its increasingly risk-sensitive nature and the upbeat market mood.
On Wednesday, the Pound began to spiral following a surprise cooldown in both headline and core inflation. Core inflation dropped from 6.9% to 6.2%, far below estimates of a cool 6.8%. This prompted investors to significantly pare back their bets on further tightening from the Bank of England (BoE).
On Thursday, the Bank of England surprised markets by pausing its current tightening cycle, electing to keep rates at 5.25% rather than pushing through another 25bps hike. Investors began to consider that this marked the end of the BoE’s tightening cycle, which sent Sterling crashing to multi-month lows against its peers.
Further weakness came on Friday after the latest private sector indexes pointed to further contractions in the UK’s manufacturing and service sector, sparking renewed recession anxieties.
US Dollar (USD) Exchange Rates Rally as Fed Leaves Door Open for One More Hike
The US Dollar (USD) began last week on steady footing as investors looked ahead to the Federal Reserve’s imminent interest rate decision.
Risk appetite increased, which saw the safe-haven ‘Greenback’ weaken against riskier assets. However, souring trade reversed these losses.
The Fed’s decision sent the US Dollar upwards, as while it left interest rates unchanged, Fed Chair Jerome Powell left the door open for additional tightening before the end of the year, if necessary.
The ‘Greenback’ sustained its forward momentum for most of Thursday as investors bet on further tightening from the Fed. However, these gains were trimmed somewhat by profit-taking as investors moved to cash in on USD’s strength.
On Friday, the latest private sector indexes for the US indicated a mixed bag. While the manufacturing sector managed to improve, the service sector edged closer to stagnation, yielding heavy selling pressure for the ‘Greenback’.
GBP/USD Forecast: Lack of Data to Limit Sterling?
Looking ahead to Monday for the Pound, the Confederation of British Industry (CBI) is scheduled to publish its distributive trades data for September. An improvement is expected, but the reading is likely to remain negative and may do little for Sterling.
Beyond this, the data calendar dries out for the rest of the week. Because of this, GBP is likely to be left exposed to shifts in the market mood and analysis of the UK’s economic outlook.
As an increasingly risk-sensitive currency, bullish trade could contribute some tailwinds. However, if investors remain mindful of the UK’s deteriorating economy, GBP may be unable to gain ground.
On Friday, the final GDP growth rate for Q2 is scheduled to print. A surprise weakening may weigh heavily on Sterling, but no change would likely do little.
For the US Dollar, the data calendar is similarly bereft throughout most of the week. Because of this, the safe haven ‘Greenback’ may be left to trade on shifting levels of risk appetite. Waning risk appetite would likely bring strength to the USD as investors would look for safer investment opportunities.
On Friday, the Federal Reserve’s preferred gauge of inflation is scheduled to print. For August, the core PCE price index is forecast to have cooled to 3.8%, which may weaken USD by leading to pared-back interest rate hike bets.
GBP to USD Forecast: Sterling on the Defensive Amid Economic Woes
The Sterling faces a tumultuous forecast, with GBP to USD under strain as UK economic indicators signal a protracted recession, highlighting considerable uncertainties.
On Friday, the GBP to USD pair declined by 0.48%. Following a 0.40% fall on Thursday, the GBP/USD ended the day at $1.22348. The GBP/USD pair rose to a high of $1.22951 before falling to a session low of $1.22304.
Deteriorating Macroeconomic Conditions Leave the GBP/USD on the Defensive
The GBP/USD will likely remain under pressure today as UK economic indicators continue to signal a lengthier economic recession. On Thursday, the Bank of England hit the brakes on interest rate hikes. The GBP/USD would need economic indicators to shift sentiment toward the UK economy to alter the bearish narrative.
On Friday, weaker-than-expected services PMI and retail sales figures supported the BoE decision to leave rates unchanged.
The UK services sector remains the main contributor to the UK economy, contributing over 70% to GDP. A more marked contraction across the services sector will continue to test the buyer appetite for the Pound.
However, investors should monitor the Bank of England’s commentary. A move away from the ‘policy pause’ script would offer much-needed support for the Pound.
Chicago Fed National Activity Index in the Spotlight
Later today, the Chicago Fed National Activity Index will draw investor interest. A larger-than-expected rise in the Index would support investor bets on a more aggressive Fed interest rate path.
Economists forecast the Chicago Fed National Activity Index to rise from 0.12 to 0.15 in August.
While the headline figure will be influenced, investors should consider the employment and consumption sub-components. Tight labour market conditions and a pickup in consumption would fuel demand-driven inflationary pressures and support further Fed rate hikes. A more hawkish Fed rate path would impact the labour market and weigh on consumer spending.
Short-Term Forecast
Economic indicators from Friday have left monetary policy and economic divergence in favour of the US dollar. US economic indicators this week must align with forecasts to keep pressure on the GBP/USD. Upbeat US economic indicators would bring sub-$1.22 levels into play.
Daily Chart
The GBP/USD pair sat below the 50-day and 200-day EMAs, sending bearish price signals. A break below the $1.22150 support level would support a GBP/USD fall to sub-$1.22. However, US economic indicators must be better than forecasts to deliver a fall through the $1.22150 support level.
Weaker-than-expected US economic indicators would support a GBP/USD move to $1.23.
The 14-period daily RSI reading of 23.89 shows the GBP/USD pair in oversold territory.
4-Hourly Chart
The GBP/USD remains below the 50-day and 200-day EMAs, reaffirming bearish price near-term signals. A break below the $1.22150 support level would bring sub-$1.22 into play.
However, a return to $1.23 would support a move to the 50-day EMA.
With a 31.19 reading on the 14-period 4-hourly RSI, the GBP/USD pair can break below the $1.22150 support level before entering oversold territory.
