Stuck between stronger growth and an accommodative BoE

Stuck between stronger growth and an accommodative BoE

Pound sterling Forecast: bearish

GBP/USD remains trapped in a side zone

  • UK labor market data will be the next big national direction
  • Fed’s Powell expected to speak next week

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Sterling will enter a new trading week at the mercy of a struggle between two obvious domestic factors.

The news that its home country emerged from an unusually short and shallow recession in the first three months of this year gave the bulls something to show off. The UK’s 0.6% economic expansion in the three months to March was better than analysts expected.

However, the May 9 monetary policy meeting at the Bank of England ended with rate-setters clearly prepared to reduce borrowing costs soon, provided economic data allows. While two of the nine committee members are already convinced that lower interest rates are needed now, a June cut remains very much in play.

This is a headwind for the British pound against the US dollar. The Federal Reserve is expected to keep the fire going until at least September. This may not pose such a problem for the pound against the euro, with eurozone rates also expected to start falling next month.

With the BoE’s views in mind, traders will look at official UK labor market figures on Tuesday. They will particularly focus on average wages and their likely impact on inflation.

Profit excluding bonuses for the month of February increased by 5.6%. The central bank may well want to see this number fall before it can feel entirely comfortable with a rate cut.

There will also be important numbers from the United States next week, which is expected to see movements in GBP/USD. April data on consumer and producer prices are available. However, the main event of the week could be Fed Chairman Jerome Powell’s scheduled speech on Tuesday. Clues on the Fed’s latest thoughts are of course gold dust for the markets.

However, assuming the data allows markets to leave interest rate expectations for the pound and dollar where they currently are, with the UK set to cut them first, it is difficult to imagine that the pound sterling maintains its current altitude. That said, the currency clearly benefits from a better risk appetite in global markets. This week will likely depend on how these two factors play out, but, from what we can tell now, it is a cautious bearish call this week for the British Pound.

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GBP/USD technical analysis

GBP/USD daily chart compiled using TradingView

Sterling remains within the clear sideways range in which it broke out of its previously dominant downtrend channel on May 3.

Support at the first retracement of the rise to the mid-July highs from the September 2022 lows still appears important for this market. It comes in at 1.24874.

Sterling bulls appear to be trying, and so far unsuccessfully, to build a base shape that allows them to successfully overcome resistance at the 50 and 200 day moving averages, both of which are now quite close to the market. To do so, they will likely need to make and sustain a break above the current range high of 1.25745.

Retail data reveals that market participants are fairly split on the outlook for GBP/USD, albeit with a slight bullish bias. This could suggest that risk appetite is currently governing trading, rather than bald expectations about interest rates.

–By David Cottle for DailyFX