Vulnerable, Reliant On US Dollar Weakness

GBP/USD Forecast: Bearish

• Most major currencies have risen against the Dollar as US inflation mellows
• The Pound has been no exception
• Domestic drivers could return this week

The British Pound looks set to start a new trading week markedly higher against the United States Dollar than it was at the beginning of the last one. However, it doesn’t look entirely comfortable at altitude and it might be rash to bet on further gains.

Like many other currencies, GBP/USD fully capitalized on global markets’ increased conviction that US interest rates aren’t going any higher this year and could indeed be reduced in the first half of 2024. This thesis was hugely bolstered by the most recent US inflation numbers. They were released last week and showed headline consumer price inflation down to 3.2% in October, from 3.7% the previous month. They also underlined the trend toward weaker inflation seen since the end of last year.

So far so good for Sterling. However, while it’s certainly benefitting from the ‘Dollar weakness’ story, news from the Pound’s own home economy hardly inspires confidence. Inflation in the United Kingdom is clearly showing some signs of weakness when it had for so long been a stubbornly strong outlier among developed economies. Of course, weaker inflation is the object of the string of rate rises made by the Bank of England in the past year. Signs that they’re working aren’t altogether bad news.

However, higher borrowing costs are clearly crimping economic activity even as the cost of living crisis may be starting to fade. Last week’s official UK retail sales figures provided a graphic illustration, with sales volumes at their lowest level since the height of the Covid-19 pandemic in February 2021. To be sure atrocious weather and some pre-Christmas belt-tightening probably hit the figures too, but the underlying picture isn’t pretty.

Throw in some political instability too, as Prime Minister Rishi Sunak struggles to assert control over his own party, and you hardly have a backdrop that screams ‘buy the Pound.’

This reality might reassert itself this week. Major scheduled risk events are sparse and we’re in the monetary wilderness between central bank meetings too. We won’t hear from either the US Federal Reserve or the Bank of England until mid-December.

We will get the minutes of the Fed’s last policy meeting though. They’re due on Tuesday. To the extent that they might remind markets that US inflation remains above target and that interest rate reductions will depend heavily on the data, they might support the Dollar against everything, Sterling included.

Wednesday will bring the UK’s autumn budgetary statement from Chancellor of the Exchequer Jeremy Hunt. With inflation on track to be halved this year, some are hoping for tax cuts. They may get them, but what is more certain is that markets will be reminded of just how little room for maneuver the government has. Global markets might not like that much.

All up while the Pound need not fall far this week, it’s hard to see it pushing on in the near term. On that basis, it’s a bearish call this week.

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GBP/USD Technical Analysis

GBP/USD Dail Chart Created Using TradingView

The near-term technical picture for GBP/USD is really all about the 200-day moving average. That comes in at 1.23990 right now and, while the market has broken above that level, it has yet to do so very convincingly.

It’s certainly a point to keep in mind as a new trading week gets underway. The bulls will need to push past it and up toward the psychologically important resistance of 1.25 to make the break look far more solid.

The first Fibonacci retracement of the rise up from the lows of September 2022 to the highs of last July is currently acting as resistance, very close to the market at 1.24870. To the downside, there’s likely to be some near-term support at mid-October’s high of 1.23079 ahead of the second retracement at 1.20791. That latter level looks safe enough at present, however.

–By David Cottle For DailyFX