- The outlook for the GBP/USD exchange rate has deteriorated significantly with the short-term picture now decidedly bearish.
- Rising geopolitical tensions, rising oil prices and weak data readings in the UK may add pressure on the pair this week.
- Amid limited trading at the beginning of the week, the GBP/USD moved in a range between the support level of 1.2127 and the level of 1.2177, with bears controlling the trend.
Bearish Factors Align
Expectations over the past five days had confirmed that the recovery would extend, which it duly did, until last Thursday's strong market reaction to US inflation numbers that pushed the US dollar higher. But the resulting price action has hurt the build-up of positive technical momentum in pairs like the British pound. Sean Osborne, senior FX analyst at Scotiabank, says he has turned bearish on the near-term exchange rate outlook as a result. He said, “Cable’s strong rejection of resistance in the middle of the 1.23 area this week is a setback that is likely to lead to a period of renewed downward pressure, at least in the short term.”
The analyst added: “The trend dynamics are shifting against the pound as well, and the continuation of the broader downtrend since mid-year suggests another test of the recent GBP low around 1.2050/55. The resistance during the day is 1.2225.”
In general, this week will be full of British data releases, and therefore distinctive fluctuations in the British pound exchange rates can be expected. According to analysts, the release of labor market, inflation and retail sales data in the UK could attract significant interest. Given the reassessment of BoE policy expectations by markets in recent weeks and the strong unwinding of sterling long positions, the pound could benefit from any positive data surprise.
Today, Tuesday, will witness the release of British labor market statistics, and the market will react to wages and changes in employment levels, as these provide an indication of the direction in which inflation trends in the United Kingdom may head in the coming months. Average weekly earnings - excluding bonuses - are expected to rise 7.8% year-on-year, unchanged from the previous month. But economists at Pantheon Macroeconomics expect a drop to 5.0% year-on-year, a significant decline that would reduce the odds of the Bank of England raising interest rates again, weighing on UK bond yields and the pound.
The market expects the headline UK unemployment rate to be 4.3% in August, unchanged from July, but higher than the 4.0% in May and the Bank of England's third-quarter forecast of 4.1%. Therefore, the Bank of England should not hesitate to keep interest rates at 5.25% next month.
Tomorrow, Wednesday, the most important British inflation numbers for September will be monitored, and the market is looking for headline inflation to decline to 6.5% on an annual basis from 6.7% previously, but the reading is expected to rise on a monthly basis from 0.3%. to 0.4%, largely due to higher fuel prices. The September release was a crucial moment for the British pound, as an unexpectedly weak reading led to a sell-off that continued throughout the month. Another decline could lead to similar price moves in October, putting GBP/USD's 2023 lows under pressure again.
Friday will see the release of consumer confidence and retail sales figures, and while these releases are unlikely to generate some interest, they are unlikely to have a material impact on the market, especially in light of the big signals that wage and inflation numbers will provide just days ago.
GBP/USD Forecast Today
According to the performance on the daily chart below, the strongest general trend for the GBP/USD pair is downward, and stability around and below the support level of 1.2150 may give bears the opportunity to move towards the most important psychological support level of 1.2000, especially if the results of the economic data listed above are negative for the British economy or the statements of Federal Reserve officials and the results of US data are supportive of further raising US interest rates.
On the other hand, and over the same time period, if what was stated is reversed, the GBP/USD may find an opportunity to rebound higher, and currently the closest resistance levels for the performance of the currency pair are 1.2250, 1.2330, and 1.2400, respectively.
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