GBP/USD Weekly Forecast: Bulls could regain control in the US CPI week



  • GBP/USD bears struggled despite the Fed-BoE policy contrast.
  • All eyes on the United States Consumer Price Index and UK Budget release.
  • GBP/USD could extend the rebound amid bullish technical setup.

The Pound Sterling ended the week almost flat against the United States Dollar (USD), having reversed a temporary pullback seen a week before. The GBP/USD pair struggled amid unabated US Dollar demand. The pair’s traders now gear up for next Tuesday’s United States Consumer Price Index (CPI) for fresh trading directives. 

GBP/USD: What happened last week?

The monetary policy divergence between the US Federal Reserve (Fed) and the Bank of England (BoE) couldn’t have become more prominent than it did in the last week, smashing the GBP/USD pair to fresh year-to-date lows at the 1.1800 level. With aggressive rate hike expectations back in play, following Fed Chair Jerome Powell’s hawkish remarks during his semi-annual Congressional testimony, the US Dollar rally picked up steam alongside the US Treasury bond yields. The US Treasury bond yields spiked to fresh multi-month highs, with the benchmark 10-year US rate having regained the closely watched 4.0% level. 

Federal Reserve Chief Powell said during his testimony that “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” He added that the “ultimate level of interest rates” is likely to be higher than previously anticipated as well. The US Dollar bulls were yearning to hear these words from Powell in order to ramp up expectations for a 50 basis points (bps) rate hike on March 22. Meanwhile, markets began repricing a peak rate of about 6% this year on the hawkish commentary.

Heightened hawkish Fed expectations deepened the pain in the GBP/USD, which extended its week’s downtrend well into Wednesday before staging a quick rebound even though the United States ADP private sector employment data and JOLTS job openings data came in better than expected and bolstered the hawkish Fed expectations. Wednesday’s ADP Employment Change data from the United States came in at 242K vs. 200K expected and 119K previous. The US JOLTS Job Openings arrived at 10.824M in January, better than the expectations of 10.600M. 

Meanwhile, the Pound Sterling buyers reel from the pain of dovish comments from Bank of England (BoE) policymaker Swati Dhingra who is warning against further interest rate increases. Dhingra said that “overtightening poses a more material risk at this point.” Cable conveniently brushed aside the Brexit-related developments, as the sentiment around the interest rate differentials between the UK and the US remained in play.

Although the GBP/USD recovery in the latter part of the week gained traction after the UK economy expanded by 0.3% in January against the 0.1% expected and -0.5% previous. Meanwhile, the industrial sector activity showed a contraction in January, the latest UK industrial and manufacturing production data published by Office for National Statistics (ONS) showed on Friday.

But it was the mixed labor market report from the United States that motivated the GBP/USD pair to recover most of its weekly losses. The US economy added 311K jobs in February when compared to the 205K expected and the stunner 504K job gains seen in January (revised from 517K). The Average Hourly Earnings arrived at 4.6% YoY in February vs. 4.7% expected and 4.4% previous, while the US Unemployment Rate climbed to 3.6% in the reported month vs. 3.4% expected and 3.4% last. Amidst softer-than-expected wage growth and the rise in Unemploylment Rate, Fed swaps downgraded odds of 50 bps March rate hike to under 50% vs. around 60% pre-NFP release. Cable recaptured the 1.2000 threshold and advanced toward 1.2100, staging a solid turnaround toward the end of the week. 

Week ahead: United States Consumer Price Index stands out

Another busy week in the offing as GBP/USD traders brace for the all-important United States Consumer Price Index (CPI) release after Friday’s Nonfarm Payrolls report. The critical US inflation data is due for release on Tuesday at 12:30 GMT, as the US turns back its clock.

On Monday, there is nothing of note in terms of economic data releases as the Federal Reserve enters its ‘blackout period’ ahead of the March 22 policy meeting. Meanwhile, the Pound Sterling will closely await the UK’s “Integrated Review refresh”, a refresh of major defense and security review by the Treasury. The speech by the Bank of England policymaker Swati Dhingra in the mid-American session will also be eyed.

Tuesday’s US CPI data will be the main event risk in the week ahead, as it is the last top-tier economic release before the Federal Reserve meeting. The US inflation data is the most important market-mover, as the Fed closely watches it for its policy guidance.

On a yearly basis, the CPI data is forecast to decline to 6.2% and the Core CPI, which excludes volatile food and energy prices, is also expected to edge a tad lower to 5.5% from 5.6% registered in January. Meanwhile, the headline CPI data is seen falling to 0.2% MoM in February, compared with a 0.5% increase reported in January. The Core CPI is likely to rise to 0.5% MoM as against the previous print of 0.4%. Ahead of the US data, the United Kingdom will feature the employment data, which could influence the GBP/USD price action.

China will report its business activity data on Wednesday, which could have a notable impact on risk sentiment, especially after the country’s CPI data came in softer than expected. From the United States docket, the Producer Price Index and Retail Sales data will be published. Meanwhile, the UK Annual Budget release will stand out on Wednesday as Chancellor Jeremy Hunt unveils his spending plans.

The US weekly Jobless Claims will be reported on Thursday, followed by the European Central Bank (ECB) monetary policy announcements, which could likely have a EUR/GBP cross-driven ‘rub-off’ effect on the British Pound.

The Bank of England will release the Statement and the Minutes of its Financial Policy Committee (FPC) meeting on Friday. Although that is unlikely to have little to no impact on the pair. Later in the day, the US University of Michigan (UoM) Preliminary Consumer Sentiment and Inflation Expectations data will drop, which will be key to assessing the US Dollar valuations.

GBP/USD: Technical outlook

GBP/USD: Daily chart

GBP/USD managed to reclaim the critical 200-Daily Moving Average (DMA) support-turned-resistance near 1.1900.

Note that the pair hovered below the latter for the most part of the week, with risks still skewed to the downside.

The 14-day Relative Strength Index (RSI) is prodding the 50.00 level, suggesting that GBP/USD could be on a sustained recovery path.

Adding credence to the bullish potential, the bullish 100 DMA has pierced through the downward-sloping 21 DMA from below, implying a bull cross confirmation.

On the road to recovery, GBP/USD will need to find a strong foothold above the confluence of the 21 and 100 DMAs near 1.2010.

Buyers could then target the flattish 50 DMA at 1.2127 once the pair stabilizes above 1.2100. The next relevant upside targets are envisioned at the 1.2200 static resistance and the Valentine’s Day high of 1.2270.

On the flip side, acceptance below the 200 DMA once again will reopen the downside toward Thursday’s low at 1.1832, below which the YTD low at 1.1803 could be retested.

A sustained move below the latter will initiate a fresh downswing toward the 1.1770 static support, below which the November 11 low at 1.1648 will be threatened. 

GBP/USD Forecast poll

The FXStreet Forecast Poll points to a bearish outlook in the near term. It’s worth noting, however, polled experts may have posted their forecasts ahead of the US jobs report. Hence, the one-week average target is likely to be outdated already. The one-month outlook remains slightly bearish, with the average target sitting at 1.2058.

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