- GBP/USD hits 15-month highs, recapturing 1.3050 on sustained US Dollar sell-off.
- The focus shifts toward the United Kingdom inflation, US Retail Sales data and Fed speakers.
- GBP/USD risks a correction toward 1.2850, as RSI remains overbought on the daily chart.
The Pound Sterling witnessed a parabolic rise against the United States Dollar (USD) this week, extending the late rebound seen a week ago. GBP/USD booked the best week since November last year in the wake of the monetary policy divergence between the US Federal Reserve (Fed) and the Bank of England (BoE). All eyes now turn to the next week’s top-tier consumer-centric data from both the United States (US) and the United Kingdom (UK).
GBP/USD: What happened last week?
GBP/USD buyers remained unstoppable and sliced through multiple critical barriers during the week as the US Dollar extended its downward spiral. The market’s belief that the Federal Reserve is nearing the end of its hiking cycle got strength after the softer-than-expected inflation data from the United States and some dovish commentary from the Fed officials.
Money markets began pricing the winding up of the Fed’s tightening program after two more rate hikes, the expected 25 basis points (bps) this month and the final 25 bps rate increase in September. Dovish Fed bets gathered steam and threw the US Dollar under the bus against its major competitors, providing extra legs to the ongoing upswing in the GBP/USD pair.
The US Producer Price Index (PPI) inflation eased by more than expected in June, printing 0.1% annually, decelerating from a downwardly revised mark of 0.9% in May. Softer PPI data came after Wednesday’s US Consumer Price Index (CPI) data, which showed that the US annual CPI inflation fell to 3% in June, marking the 12th consecutive month of declines and the lowest number since March 2021. The annual US core inflation rate eased to 4.8% in June vs. 5.0% expected and 5.3% previous, while the monthly core CPI rose 0.2% in the reported month, compared with a 0.3% rise expected and May’s 0.4%.
At the start of the week, dovish commentary from several Fed policymakers fanned expectations that the Fed is close to its peak rate. San Francisco Fed President Mary Daly said that while the risks of doing too little are still greater than those of overdoing it on rate hikes, the two sides are getting into better balance as the Fed nears “the last part” of its hiking cycle. Meanwhile, Fed Vice Chair for Supervision Michael Barr said, “We still have a bit of work to do,” adding that “I’ll just say for myself, I think we’re close.”
Following soft US inflation data, investors shrugged off some hawkish commentary from Daly and Fed Governor Christopher Waller delivered in the latter part of the week. Daly said it was too early to declare victory on inflation, adding that “we need to move rates up to restrictive territory.” Meanwhile, Federal Reserve Governor Christopher Waller said. “the robust strength of the labor market and the solid overall performance of the US economy gives us room to tighten policy further.” Wall Street Journal’s (WSJ) Nick Timiraos, so-called Federal Reserve whisperer, stated that Waller’s remarks suggest that the September meeting could be a live one for a potential rate hike.
In light of the dovish Fed outlook, the US Dollar Index renewed 15-month lows near 99.60, driving GBP/USD close to 1.3150 levels. Cable also found support from the upbeat UK labor market report, which continued to justify the case for more tightening by the Bank of England. The UK Unemployment Rate ticked higher to 4.0% in three months to May while the wage growth hit a record high of 7.3% 3M YoY May. The divergence between the Fed and BoE policy outlooks favored GBP/USD buyers. Recall that the BoE surprised markets earlier this month by announcing a 50 bps rate hike to tame sticky inflation.
On Friday, the US data showed that the University of Michigan’s Consumer Sentiment Index improved to 72.6 in July from 64.4 in June. The one-year inflation outlook of the survey edged higher to 3.4% from 3.3% and the 5-year inflation outlook ticked up to 3.1% from 3%. These figures helped the USD shake off the selling pressure ahead of the weekend and limited GBP/USD’s upside.
Week ahead: UK inflation and US Retail Sales data in focus
Following a blockbuster week data-wise, Pound Sterling traders look forward to another busy week, as the CPI inflation data from the United Kingdom is set to rock GBP/USD.
The week kicks off with a bunch of business activity data from China on Monday, which could set a risk theme for the week ahead, impacting the valuations surrounding the safe-haven US Dollar.
Tuesday will feature the United States Retail Sales report, followed by the Industrial Production data and a few other minority releases. From the UK side, BoE policymaker Dave Ramsden is due to speak about quantitative tightening at the Money Macro and Finance Society in London.
The UK CPI data will stand out on Wednesday, which will likely have major implications on the BoE’s rate hike outlook, in turn, on the British Pound. Meanwhile, the US docket will see the release of the Housing Starts and Building Permits data.
The BoE will publish its Quarterly Bulletin on Thursday, but it is unlikely to have any relevant market impact. It will be the usual weekly Jobless Claims from the US on Thursday, followed by the Existing Home Sales report.
On the final trading day of the week, the UK Retail Sales data will likely make up for an empty US calendar.
GBP/USD: Technical outlook
GBP/USD confirmed a descending triangle breakout last Friday and, therefore, witnessed a major extension to the upside after the technical breakout.
However, further upside appears elusive heading into a new week, as the 14-day Relative Strength Index (RSI) hovers within the overbought territory while Pound Sterling buyers face stiff resistance near the 1.3150 psychological level, near where the April 14 2022 high aligns.
If the pair manages to surpass the latter on a sustained basis, the next resistance at the March 23 high of 1.3298 will be tested. Ahead of that, the 1.3200 round figure could emerge as a tough nut to crack for GBP/USD optimists.
Alternatively, any retracement in the GBP/USD pair could meet initial demand at the critical 1.3000 resistance-turned-support, below which a deeper correction toward the 1.2850 region cannot be ruled out.
The last line of defense for Cable buyers is envisioned at the bullish 21-Daily Moving Average (DMA) at 1.2797.
GBP/USD sentiment poll
The FXStreet Forecast Poll shows GBP/USD moved way beyond market expectations, as the pair hovers around 1.3100 by the end of the week, far above the weekly low of 1.2749. Bears jump from 50% in the weekly view to 79% in the monthly perspective and stand at 70% in the quarterly view, with bulls then barely reaching 10%.
However, the Overview chart shows that the weekly and monthly moving average maintain their upward slopes, although strength fades in time. In the quarterly perspective, most bets accumulate in the 1.2500/1.3000 price zone.