British Pound Forecast: Bearish
- GBP/USD has benefited fully from USD Weakness
- However, this week brings both the Fed’s rate call and nonfarm payroll data
- These could see the Dollar claw back some ground
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The British Pound heads into what promises to be a fascinating new trading week in stronger form against the United States Dollar, but the latter will be providing most of the impetus over the next few days.
The week will bring May’s monetary policy decision from the Federal Reserve and key official labor market statistics out of the US. These are of course two of the most crucial data points for traders and economists. The United Kingdom’s economic schedule would be unable to compete at the best of times but in fact, it’s extremely sparse, which will likely leave trading focus more than usually focused on the USD side of GBP/USD.
The Fed is expected to leave borrowing costs at their current, inflation-fighting highs on Wednesday, with no reductions now priced into Dollar markets until well into the second half of this year. Assuming these expectations are met the Dollar is likely to remain firm on the thesis that other major central banks may now reduce their own interest rates before the Fed, or at the very least not long after it.
This repricing has played a huge part in Sterling’s overall weakness against the Dollar this year.
Still, the broad US Dollar index drifted lower over the last week, with Sterling benefitting as did many other currencies. The Pound has also likely benefited from clear signs that its home economy isn’t doing as badly as many feared it might at the start of this year. Stubbornly high inflation has relaxed its grip significantly, and London’ blue-chip stock index has participated fully in global stock gains.
May 3’s nonfarm payrolls data are likely to be the week’s main trading event, with more scope for shocks than the Fed call. Continued strength in the data will underline the US economy’s resilience and could see rate-cut bets pushed even further back. It will probably take a considerable downside surprise to see them brought forward.
On the basis that the coming week is likely to underline the ‘higher for longer’ US interest rate scenario, it’s likely to support the Dollar against most rivals, including Sterling. The Pound may also slip back quite naturally after such a strong run of gains, so it’s a bearish forecast this week.
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Despite several consecutive days of quite strong gains, GBP/USD remains well within its broad downtrend channel from March 11, at least on a daily closing basis.
This channel has been quite well respected. The rate closed just about exactly on it on April 22, setting the stage as it turned out for subsequent strong gains. The channel base now offers support at 1.2301, but that doesn’t seem to be in much immediate danger of a near-term test.
The upper boundary may face pressure first, and that comes in at 1.25393. A durable break above it might well be a longer-term bullish signal, but sterling bulls have a big job on their hands to bring that about.
The 200-day moving average is now a resistance level just below that mark at 1.25559.
GBP’s most recent vigor has taken it back above the retracement support surrendered in the heavy fall of April 12. The top of that fall offers resistance at 1.25354.
–By David Cottle for DailyFX