- The pound sterling is likely to hit its highest level in several months against the US dollar this week, supported by positive technicals.
- However, any weakness in UK wage data – or a surprise beat in US inflation data – could lead to a sharp sell-off.
According to currency trading platforms, GBP/USD continued its six-day winning streak on Friday, reaching a new 2024 high near 1.2895, its best level since July 2023. GBP/USD is currently trading around 1.2810. The gains are largely due to the broader weakness in the US dollar, which followed a series of weaker-than-expected US economic data, culminating in Friday's weak wage figures. This boosted bets that the US Federal Reserve will be in a position to cut interest rates in upcoming June.
Commenting on the pair's performance, Fawad Razaqzada, an analyst at City Index, said: "The 0.45% daily gain in GBP/USD confirms the increasingly positive technical set-up and it is clear that the broader trend is bullish." The analyst added: "We will look for buyers on dips to step in on any short-term pullbacks to previous resistance levels. These include 1.2828, the December high, followed by the 1.2800 handle and 1.2760, a former resistance level."
On the upside, the City Index analyst says there are no immediate reference points until the July high of 1.3140. "Before that, the key psychological resistance for GBP/USD is 1.30, which is my main upside target."
Generally, the British pound is the best performing G10 currency in 2024 amid improved sentiment towards the British economy. It is widely expected to have emerged from recession in the second half of 2023 in light of a widespread improvement in economic survey data in the United Kingdom. For her part, Kathleen Brooks, an analyst at XTB, says: “I dare say it, the rise in the price of sterling is also a sign of confidence in the UK, after a rather dismal few years.”
Markets see the Bank of England potentially cutting interest rates after the US Federal Reserve and European Central Bank, which supports UK bond yields compared to elsewhere, leading to increased demand for sterling. The risk is that this narrative is challenged by the data, which is encouraging the market to increase bets on a June rate cut, leading to a reversal of recent outperformance. Even a small miss could provide a welcome break from recent gains. With that in mind, all eyes will be on UK wage data on Tuesday, with any weakness likely to lead to a sharp sell-off in GBP/USD and other sterling crosses.
According to the economic calendar, the market is expecting a 5.7% increase for January (when bonuses are included) and a 6.2% increase when bonuses are excluded. Also watch for the release of monthly GDP figures on Wednesday for January, which are expected to come in at 0.2% on a monthly basis. Any above-consensus readings in either GDP or wage figures could help the pound continue its journey upward,
The key events for the US dollar this week will be the release of US inflation figures for February on Tuesday and US retail sales on Thursday. Currently, the market is expecting the CPI reading to come in at 0.4% on a monthly basis and 3.1% on an annual basis. The core CPI figure could be more important, with a 0.3% monthly and 3.7% annual reading expected.
GBPUSD Expectations and Analysis Today:
Given the strong sell-off in the US dollar in recent days, the biggest surprise would come at a reading above consensus, as this would spoil the narrative that all signs now point to a rate cut in June. Thus, we expect the US dollar's biggest reaction to be to the upside on any trend “the downside for GBP”. Therefore, any decline in value would allow the recent trend of currency depreciation to expand.
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