The US dollar continued to gain ground today, helped along by a stronger than expected jobless claims data. All eyes will be on the nonfarm payrolls report on Friday, which could set the tone in the FX space for the week ahead. Should US data turn out to be stronger than expected, then the greenback could make back more ground, especially against currencies where the central bank has more policy loosening to do, such as the pound. The GBP/USD forecast could turn modestly bearish in the event NFP turns out to be stronger than expected. I expect the BoE to cut rates sooner than expected by markets – in March instead of April.
US dollar extends recovery ahead of payrolls report
Recent US data has been all over the place so far this week, ultimately failing to give the dollar a strong sense of direction following the Venezuelan headlines from earlier this week. While jobless claims came in better than expected today at 208K, and ADP employment came in broadly in line with expectations at 41K, November’s job openings data was notably soft and went some way towards offsetting the upbeat ISM services print. Openings fell to a more than one-year low, while hiring slowed, underlining that most employers remain cautious about making meaningful changes to headcount. Overall, this week’s employment indicators reinforce the view that Friday’s jobs report won’t be weak enough to justify additional Fed easing just yet. That, in turn, may help to keep the dollar mildly supported in the near-term outlook.
What has also stood out this week is how well the dollar has held up despite falling oil prices, with commodity markets appearing to take Trump’s plans around Venezuelan supply seriously. Today, though, oil prices bounced back. I suppose oil may only become an issue should WTI break the $55 handle. If so, that could cap the gains for the dollar.
GBP/USD forecast: Pound likely to remain under mild pressure
For the pound, it is all about what the Bank of England is going to do next. Recent data here is increasingly pointing towards further rate cuts, but the Monetary Policy Committee remains cautious and deeply divided. While February looks too soon for another move, the balance of evidence suggests a cut in March, followed by another in June. One particular area of concern for the MPC hawks is employment, where vacancies have fallen sharply and are now below pre-pandemic levels, while redundancies appear to be rising. This matters because wage growth is slowing rapidly. Private sector pay growth has fallen from around 6% earlier last year to just under 4% by autumn. As a result, inflation could fall back quicker. As food prices and rents both cool, services inflation should weaken as well, further supporting the case for more rate cuts. Let’s not forget about base effects from last year’s tax hikes, which to will also push inflation lower from April onwards. Combined with falling energy prices, headline inflation should drop to around 2% from April and stay close to that level through the rest of the year.
While markets now see April as the most likely timing, I would argue March is more probable for the next cut. By then, the MPC will have several more wage and labour market reports, which should provide reassurance that inflation pressures are indeed easing. February, though, might come too soon.
GBP/USD forecast: technical analysis and key levels to watch
The GBPUSD chart continues to print higher highs and higher lows, so the trend is yet to reverse completely despite the reversal from the 1.35 handle over the past few days. With bullish momentum starting to fade, and the absence of strong upside follow-through suggests bullish conviction may be weakening. This is especially the case as price has recently pushed into a long-term resistance band spanning roughly 1.35 to 1.40 area.
It’s still premature to call a major top, but failure to hold above the 1.35 handle may be a sign for concern. Traders who entered following Monday’s bullish engulfing candle are quickly finding themselves on the back foot. A break below Monday’s low of 1.3415 could increase the risk of position unwinding, potentially triggering a downside squeeze and a deeper corrective move in cable.
On the downside, initial support is located near 1.34 — a technically significant level that also coincides with the 200-day moving average. A decisive break below this area would tilt the risk towards a more pronounced trend reversal. On the upside, resistance is now clearly defined around 1.3500, with a secondary hurdle near 1.3550.
Overall, the GBP/USD forecast is becoming increasingly indecisive. Upcoming US labour market data could set the tone for the cable in as far as the near term is concerned. The slightly longer term view will be determined by the BoE’s actions later this quarter.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
