GBP/USD forecast supported ahead of key US data – Currency Pair of the Week

• GBP/USD forecast supported by stronger UK data
• US dollar hit by signs of cooling labour markets ahead of key inflation data
• GBP/USD technical analysis points higher

GBP/USD forecast has improved ahead of US CPI and UK wages data

The GBP/USD edged higher in a quiet trade, mirroring price action across the FX space, in the first half of Monday’s session. The lack of any major nears meant the markets would make a tepid start to the week, although this could be the calm before the storm as we have rather important inflation data coming up from the US in mid-week. The GBP/USD forecast could be additionally impacted by the upcoming UK wages data on Tuesday.

The pound managed to close off its lows last week after being hit by a slightly more dovish Bank of England on Thursday morning before finding support by a combination of disappointing US jobless claims data later on in Thursday session, and surprisingly strong UK growth data on Friday. More volatility is expected ahead for the pound, with UK wages coming up on Tuesday.

Meanwhile, the US dollar will be in focus this week, with FX investors looking forward to the release of Consumer Price Index (CPI) on Wednesday, which is going to be the next big catalyst for the GBP/USD and the dollar in general.

The greenback as been able to hang around thanks largely to concerns about sticky nature of inflation in the US keeping monetary policy tight for longer. But should US inflation data surprise to the downside, then this could send it sharply lower as investors price in more rate cuts for 2024 than the two expected.

The greenback fell on Thursday following the release of weaker-than-expected jobless claims data, a week after we had disappointing non-farm payrolls and ISM PMI data. On Friday, however, inflation concerns came back to the forefront, after a closely-watched University of Michigan survey revealed a jump in inflation expectations, even as consumer sentiment dropped sharply.

Attention turns to inflation in big week for US data

Some significant US data releases are coming up this week, kicking off with the Producer Price Index (PPI) on Tuesday, followed closely by the Consumer Price Index (CPI), Retail Sales data, and the Empire State Manufacturing Index, all scheduled for Wednesday. Thursday brings the unveiling of Housing Starts & Permits figures, along with the Philly Fed index, industrial production data, and weekly jobless claims.

But it will be the inflation data that will provide substantial insights into the likely duration of elevated interest rates. Following Friday’s release of the University of Michigan's Inflation Expectations survey, which showed a spike to 3.5% from 3.2% the previous month, April's PPI and CPI data carry significant weight in either intensifying or alleviating inflation concerns, depending on their direction. CPI has consistently surpassed expectations since the beginning of the year. Economists’ projections suggest CPI may have eased to 3.4% year-on-year in April, compared to 3.5% in the previous month. On a monthly basis, a 0.4% uptick in headline CPI and a 0.3% increase in core CPI are anticipated.

GBP/USD forecast: UK’s economy rebounds strongly ahead of wages data

For British pound, the focus remains on inflation indicators. This week, we have the closely watched Average Earnings Index to focus on, with the latest data due for release on Tuesday.

Hotter-than-expected wages data has kept the Bank of England refraining from committing to a rate cut in June, even if it has provided the strongest hint yet of a cut come the summer. The latest wages data has the potential to sharply impact UK interest rates pricing, which in turn could move the pound noticeably. The Average Earnings Index unexpectedly remained at +5.6% in the three months to February compared to a year ago. The reading for the three-months to March is expected to show a softer reading of 5.3% year-over-year. With CPI cooling to 3.2% y/y in March, the BoE will need to see a corresponding drop in wages growth before it can be more confident that inflation is heading to its 2% goal in the medium term.

On Friday, we saw surprisingly strong data from the UK, which showed the economy grew at an above-forecast 0.6% in the first quarter. This was primarily attributed to a stronger performance in March, where output increased by 0.4% month-on-month, while February's GDP was also revised upwards to 0.2%. The expansion of GDP was widespread, with a notable contribution from consumer-facing services, surpassing expectations at 0.7% quarter-on-quarter compared to the anticipated 0.4% reading. The unexpectedly robust growth in the first quarter indicates that the economy is making strides towards recovery after a dismal couple of years marked by low output and high inflation, leading to stagnation. Encouragingly, there is some positive momentum evident from business survey data in the early stages of the second quarter, suggesting bullish momentum prevailing in the current period.

BoE still set to cut rates in summer

With inflation now nearing the Bank of England's target, a rate cut still appears likely to occur in the summer months. Friday’s strong growth figures are unlikely to dissuade the dovish members of the Monetary Policy Committee significantly. Whether the cut will take place in June or August remains uncertain, but its timing will undoubtedly hinge on forthcoming CPI and wage data. At its most recent meeting last week, the Bank of England provided its strongest indication yet of an impending summer cut. Governor Bailey expressed optimism regarding the trajectory for policy loosening. This sentiment was echoed in the Bank of England's adjustment of its inflation forecasts, now projecting 2.6% in one year's time (down from 2.8%) and 1.9% in two years' time (previously 2.3%).

In fact, with two MPC members voting for a cut last week (Ramsden and Dhingra), one more than anticipated, an early rate reduction as soon as June wouldn't be overly surprising, particularly if we witness a couple of inflation and wage prints below expectations. However, considering the Federal Reserve's reluctance to implement early rate cuts, the Bank of England is likely to proceed cautiously. Therefore, August appears more probable.

GBP/USD forecast: technical analysis and levels to watch

Source: TradingView.com

The technical picture on the GBP/USD is improving. The cable has broken its downward trendline, after receiving strong support at the 1.2450 level last week. At the time of writing, it was trying to move out of a significant resistance zone spanning from 1.2500 to 1.2550. In this zone, we also have the convergence of the 200-day moving average with previous support and resistance level. A potential breach above this range on a daily closing basis would signal a bullish trend, potentially propelling rates towards 1.2700 and beyond in the coming days and weeks, data permitting.

However, if the support at 1.2450 is breached first, it would indicate a bearish turn of events, potentially leading to a drop below the yearly low of 1.2300. However, this scenario is not my primary expectation, as I hold a bearish outlook on the US dollar.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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