The GBP/USD is rising again as global equity markets recover with potential for a push to 1.25 resistance if Thursday's US GDP reading disappoints. According to trading, the GBP/USD pair rebounded by half a percent in mid-week trading, to the highest level at 1.2490, coinciding with the return of cautious calm to the markets.
The pound, the euro and other major currencies were offered for sale against the dollar only 24 hours ago amid a broad decline in global stock markets as investors interacted with new concerns about the US banking sector. Middle-tier lender First Republic Bank said it suffered $100 billion in deposit outflows during the first quarter as banking sector concerns grew following the collapse of Silicon Valley and Signature Bank.
However, First Republic Bank remains afloat and there are no signs of stress elsewhere in the sector, meaning concerns are waning at the time of writing.
The next major development on the horizon for GBP/USD is the preliminary estimate of the US GDP on Thursday, which is scheduled for release at 13.30 GMT. The number is expected to be lower than forecasts by economists at Wells Fargo, the US commercial, retail, and investment bank. If correct, the surprise could lead to further dollar weakness allowing GBP/USD to recover back towards the 1.25 region. Wells Fargo adds that the official revision of core retail sales in the US this week means that headline GDP will be significantly lower than consensus expectations when it is released Thursday.
The Commerce Department revised data on US core retail sales this week to show significantly slower growth in January and February, pointing to much lower growth in personal consumption expenditures (PCE) in the first quarter than the first report. As a result, we have lowered our forecast for real PCE growth for the first quarter to 2.6% from 4.4% previously. This revision of our forecast for PCE growth, together with a revision of our estimate of inventory accumulation, pulls our overall GDP growth forecast down by a full percentage point.
Wells Fargo is now looking at real GDP growth of just 0.8% in the first quarter. As of this writing, the consensus expectation was still 2.0%, setting the stage for a target failure. The dollar tends to drop on disappointment in US data as it increases the likelihood of a Fed rate cut later in the year, meaning that if Wells Fargo is correct, GBP/USD's recovery could be supported at the weekend.
But the market could have already detected a possible bearish surprise by now, suggesting that a large gap to the downside would be required to activate GBP/USD gains. But those watching GBP/USD should keep in mind that sentiment remains fragile for the time being amid fears of a looming US recession linked to rapidly rising interest rates.
Disappointing corporate earnings and banking sector worries could erupt at any time, providing bouts of strength for the dollar, even if it appears to be losing value over a multi-month time frame.
GBP/USD Technical Outlook
- In the near term and according to the performance of the hourly chart, it appears that the GBP/USD pair has recently completed an upward breach from the descending channel formation.
- This indicates that the market sentiment has changed from bearish to bullish. Therefore, the bulls are looking to extend the current rebound towards 1.2447 or higher to the 1.2477 resistance.
- On the other hand, the bears - the bears - will be looking to pounce on profits at around 1.2382 or below at the support at 1.2354.
In the long run, and according to the performance on the daily chart, it appears that the GBP/USD is trading within a neutral channel formation. This indicates that there is no clear directional bias in market sentiment. Therefore, the bulls will target bullish profits at around 1.2537 or higher at the resistance at 1.2653. On the other hand, the bears - bears - will be looking to pounce on pullbacks around 1.2313 or below at the 1.2190 support.
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