The GBP/USD exchange rate managed to pull back from its highest level in more than a year last week, but economic headwinds on both sides of the equation now risk seeing it sidelined into further consolidation. The GBP/USD price approached the 1.27 resistance last week, before it declined amid profit-taking sales, reaching the support level 1.2444, before settling around the 1.2530 level at the time of writing the analysis. The selling operations came after official figures warned of a weak end to the quarter. The first is for the British economy just as data from the US helped the dollar to come back in strength on Friday.
Overall, dollars were bought broadly when a jump in welfare claims related to unemployment and hawkish rhetoric from some federal policymakers followed a University of Michigan survey indicating that consumers' expectations for long-term inflation reached their highest level since 2011 last month.
Joseph Capurso, analyst at the Commonwealth Bank of Australia, said: “The increase in inflation expectations will cause some concern within the FOMC. Michelle Bowman, a deputy on the Federal Open Market Committee, indicated that US interest rates may need to be increased further if inflation and the labor market do not subside further. "A lot of Fed rate cuts are being priced in in the near term in our view," the analyst added. We expect the FOMC to start cutting the funds rate in January 2024, not September 2023 depending on market pricing.”
Friday's survey could be a concern for the Fed because central bankers believe rising inflation expectations could raise actual inflation through its impact on firms' pricing intentions and workers' wage bargaining behavior. This is important for the US dollar because it is a further indication that investors and traders in the interest rate market are wrong to bet recently that the Fed is likely to cut interest rates before the end of the year.
Commenting on the performance, Athanasios Vamvakidis, head of forex research at BofA Global Research, said: “Nobody we've spoken to expects the Fed to cut interest rates this year, despite market rates, but the vast majority still expect cuts next year. .” The analyst added, “We may see some strength for the US dollar once market prices stop the cuts this year, but the rally should be contained if the cuts are pushed into early next year.”
Market prices have suggested for a while that up to three interest rate cuts are likely this year, weighing on the US dollar while helping the pound reach some of its best levels since April 2022 along the way. However, the risk now is that Fed officials dampen market assumptions about interest rate cuts from the speaking circuit this week with potentially negative implications for the pound, which should also overcome domestic risks.
These include April employment figures released on Tuesday and a crowded array of appearances from BoE rate-setters including testimonials before the Treasury Select Committee on last week's rate decision on Thursday. It also comes after the Bank of England said that "tightening labor market conditions, wage growth behavior and service price inflation" will guide future policy decisions, adding to the importance of Tuesday's data.
Adam Cole, senior forex analyst at RBC Capital Markets, said in a note that clients should bet on further declines in GBP/USD this week. And “the major hurdle is the labor market data this week, which pushed the market prices higher,” he adds, while flipping the pound sterling down to 1.2250.
Overall, many in and around the market may also be paying attention to the congressional negotiations on the US debt ceiling although it is not clear what effect they can expect on the dollar yet. Debt ceiling negotiations are an annual event, but this time they have been complicated by an exceptionally polarized political environment and the administration's loss of a majority in Congress last year. It is estimated that lawmakers have until the end of the month to reach an agreement before the government is forced to choose between a technical default and a partial shutdown that includes temporary furloughs for public sector employees, which would be another blow to the already slowing economy.
Sterling forecast against the dollar today:
- According to the performance on the daily chart below, the bulls are trying to preserve the direction of the GBP/USD.
- Breaking the resistance 1.2570 will restore the bulls' control over the trend and launch them to stronger bullish levels.
- On the other hand, if the bears move in the currency pair towards the support level 1.2370, the bullish view of the currency pair will end and change to bearish.
- I still prefer selling the GBP/USD from every upside.
Ready to trade our Forex daily forecast? We’ve shortlisted the best regulated forex brokers UK in the industry for you.
