- The pound has fallen from its highest level in March against the US dollar and risks another setback if UK inflation disappoints and the Federal Reserve takes a hawkish stance.
- Currently, the GBP/USD pair is stabilizing around 1.2740 at the time of writing the analysis.
On Friday, March 8, the pound-dollar exchange rate peaked at the resistance of 1.2893. At the same time, the RSI reached 70, indicating overbought levels which were due for a pullback. This was duly followed, with the GBP/USD pair falling back below 1.1750, helped by some stronger-than-expected US inflation points. However, the pullback was not deep enough to threaten the 50-, 100- and 200-day moving averages, suggesting that we are only seeing a retracement within an uptrend that is still intact.
Technically, a break below the 50 DMA at 1.2686 would alert us to a significant change in trend, while a break below the 200 DMA (1.2589) would turn the pair bearish.
In general, the main risks for the pound sterling in this week’s trading are the release of inflation numbers on Wednesday, the purchasing managers’ index and the Bank of England’s decision on Thursday, and British retail sales on Friday. According to the results of the economic calendar data, the headline consumer price index inflation rate is expected to decline to 3.6% in February from 4.0% in January, and the increase on a monthly basis is expected to reach 0.6%, up from -0.6%.
Overall, the pound will come under pressure if the reading comes below expectations. In this regard, Brian Martin, head of economics at ANZ Bank, says: "We expect a sustained return to 2% inflation this year." Added, "We expect wage growth to slow to around 4% year-on-year by mid-year, allowing the Bank of England to be confident that core inflation is falling sustainably."
Ultimately, the Bank of England is expected to keep interest rates unchanged at 5.25%, but any changes to the accompanying statement and voting composition are likely to move markets. If another member of the Monetary Policy Committee (MPC) joins Swati Dhingra and votes to cut, the pound could come under pressure. Therefore, any shift in guidance suggesting the possibility of future rate cuts could also weaken the pound. Commenting on the event and the expected reaction, a Westpac memo says: "The hawks and core MPC members are likely to maintain their views and keep the Bank of England on hold. Consequently, GBP/USD may have stumbled but should be contained in a range above 1.2700-1.2950 at the BoE meeting."
According to Credit Agricole analysts, "The pound may be vulnerable to any evidence that more MPC members are gathering around the view of stabilizing interest rates and/or cutting rates." ANZ Bank adds, "We believe August is the earliest the MPC will get enough evidence of progress on inflation to start cutting rates. Meanwhile, the May labor market report and June inflation data will feed into their updated macroeconomic forecasts as part of the Monetary Policy Report."
Economic Outlook
Thursday will see the release of March PMI data, which will give a strong indication of activity this month. Also, the headline services PMI is expected to read at 54.2, indicating strong growth and confirming that the recession is indeed over. Overall, markets are taking a "long" position on the pound, suggesting that it will take a big beat to make meaningful gains. Along the same lines, the bigger reaction is likely to be on the downside on any data misses.
On UK retail sales, the January retail sales release for December showed an unexpected decline that led to a good sell-off in the pound. At the same time, the February release showed retail sales up 3.4% year-on-year in January, suggesting that the UK economy is likely to emerge from recession at the start of the new year. Eventually, retail sales are important, and another strong reading could support the pound and confirm that a strong recovery is underway.
From the dollar side, the upcoming event to watch is the announcement from the US Federal Reserve. Following the release of inflation and wage data, the next major event facing the US dollar is the US monetary policy decision for March, scheduled for Wednesday at 18:00 GMT. The Federal Reserve is expected to keep US interest rates unchanged, likely reflecting the recent "steadiness" in inflation in the United States and strong data outcomes.
The extent of the Federal Reserve's voice regarding the need to maintain US interest rates steady will be intriguing and could pose upside risks to the dollar. Furthermore, upgrades to the Federal Reserve's new economic projections and interest rate expectations represent additional upside risks to the US dollar.
According to analysts, "The US dollar could be going through a better time. The Federal Reserve's median dot for -75 basis point cuts in 2024 is shaky, needing only two officials to back off. As it stands, after two strong consecutive consumer price index readings, March's readings..."
The key concern for the markets will be any signs that the US inflation is more stable, the real economy more resilient, and financial conditions easier, viewed by Federal Reserve officials as warranting somewhat less accommodation from here. Also, the extent that this gives the US dollar interest rate appeal, if we get a push, the currency can regain its strength more broadly.
GBPUSD Expectations and Analysis Today:
According to the performance on the daily time frame chart the price of the GBP/USD pair is still on a downward correction path. Technically, a break in the general upward trend will be achieved if the bears move in the currency pair towards the support levels of 1.2675 and 1.2600, respectively. Conversely, over the same time period, the psychological resistance 1.3000 will remain the most important to confirm the strength of the upward trend, and this requires stability above the resistance 1.2830. This week's data and events will have importance in determining the course in one of the two directions, and we expect performance to remain within narrow ranges until reaction to them.
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