GBP/USD forecast: Currency Pair of the Week – June 17, 2024

The GBP/USD has not gone anywhere fast in the past several weeks, but now faces a potentially volatile week with the upcoming Bank of England rate decision, UK CPI, retail sales from both sides of the pond and global PMI data all on tap this week. Plus, there is the added uncertainty from the upcoming UK general election. The GBP/USD forecast is therefore in focus, making it one of this week’s important FX pairs to watch.

GBP/USD forecast: retail sales among US data highlights

Last week’s hawkish-leaning FOMC meeting where the Fed signalled just one rate hike in its dot plots was countered by renewed weakness in US data. As well as disappointing weekly jobless claims and consumer sentiment data, both CPI and PPI measures of inflation came in weaker than expected while import prices surprised with a drop. Still, the dollar rallied, most notably against the euro, thanks to elections uncertainty in France and rise of far-right parties across Europe. That led to a more defensive positioning with equity indices also falling in Europe.

In the week ahead, the US data calendar is quite quiet, which could see the greenback give back some of its FOMC-linked gains as investors continue to price in more rate cuts than projected by the Fed.

At last week's FOMC meeting, Fed Chair Jerome Powell characterised the US consumer as 'solid' which puts the upcoming release of retail sales data on Tuesday into focus. Sales are expected to have risen by 0.3% month-over-month in May vs. a flat reading the month before. Core retail sales are seen rising 0.2% on the month, similar to April.

Thus, should retail sales data disappoint expectations then this should increase market pricing of Fed rate cuts this year, potentially paving the way for renewed dollar selling. This week’s other data highlights include industrial production, also on Tuesday, as well as jobless claims, Philly Fed manufacturing index and building permits all on Thursday, and US PMIs and existing home sales on Friday.

But first up, we have empire state manufacturing index due for release later today, expected to print -12.5 compared to -15.6 last.

If this week’s US data releases fail to impress, then the only other factor that could potentially keep the dollar supported is the ongoing French election risk. This is likely to remain the main driver of the EUR/USD pair, which could potentially keep the dollar supported against other pairs too if risk appetite sours further.

GBP/USD forecast: Busy macro week amid elections uncertainty

Domestically, UK investors have a lot on their plates. As well as key economic data releases that include CPI and retail sales, we also have a Bank of England rate decision coming, and not to mention the UK’s own elections due on July 4.

We have seen the FTSE pull back in recent days as opinion polls continue to show a huge lead for the UK Labour Party, seen as being less business-friendly than the Conservatives. So far this hasn’t hurt the pound much, perhaps because Labour’s manifesto did not reveal any major surprise policy.

In contrast, the Tories have offered a variety of tax cuts, which could be inflationary. These include a further 2% cut to national insurance and abolishing it altogether for self-employed workers. They have also promised to abolish stamp duty for first-time buyers on homes worth up to £425,000.

This week, though, politics might play second fiddle to macroeconomics when it comes to the pound volatility.

In particular, Wednesday and Thursday should be quite busy for the pound, with the release of UK CPI followed by the BoE policy decision a day later.

UK CPI and BoE rate decision

Ahead of the Bank of England’s policy decision on Thursday, we will have seen the latest CPI data a day earlier. Last month, we saw CPI eased closer to the BoE’s target, falling to 2.3% y/y in April from 3.2% in May, with the sharp drop being due to calendar effects after the high monthly figure from March 2023 dropped out of the y/y equation. Still, an even weaker CPI was expected, while the m/m rate was stronger at 0.3%. This time, CPI is expected to have fallen to the BoE’s target of 2% with core CPI seen easing to 3.5% from 3.9% previously.

With wages and services inflation still around 6%, the fight against inflation continues. The BoE is therefore unlikely to make a move yet. It is seen cutting rates in August, according to nearly all of 65 economists polled by Reuters, and most of them expect at least one more reduction this year. If it provides a clear hint of an August cut, then this may hurt the pound in immediate response. However, the risk is the BoE may appear more hawkish.

Global manufacturing and services PMIs

On Friday, we will have UK, Eurozone and US PMIs to look forward to. While the rate of inflation has eased, prices continue to rise across Europe, putting pressure on wages. Services PMIs have pointed to high price pressures as a result, and this is something to monitor. Concerns about demand have been a key theme impacting commodities as households around the world continue to struggle with the cost-of-living crisis. We have seen continued weakness in global manufacturing activity throughout this year, which has raised concerns over economic growth. The trend of weaker industrial PMI data that has been prevalent across Europe and US needs to be arrested to bolster investor confidence.

Week’s macro highlights for GBP/USD

Meanwhile, we will also have UK retail sales to look forward to this week, which has the potential impact the GBP/USD forecast this week.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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