GBP/USD, Oil Forecast: Two trades to watch 160726

GBP/USD Jumps to Two-Month High on Chancellor Reports and Softer Fed Outlook

GBP/USD has climbed to a two-month high above 1.35 as investors continue to scale back Federal Reserve rate hike expectations and welcome reports over the UK's next Chancellor.

Reports that Home Secretary Shabana Mahmood will be appointed Chancellor by incoming Prime Minister Andy Burnham have helped to reassure the market and ease concerns. The market had been fretting that Burnham could appoint a more fiscally expansionary candidate, such as Ed Miliband. UK government gilt yields are edging lower on the news.

Meanwhile, UK GDP data showed the economy returned to growth in May after contracting in April. GDP rose 0.1% month-on-month, beating expectations for no growth following April's 0.1% decline.

Looking beneath the headline, the services sector, which accounts for around 80% of the UK economy, expanded 0.3%. However, construction output fell 0.8%, while industrial production declined 0.5%, suggesting the recovery remains uneven.

Looking ahead, renewed tensions in the Middle East could cloud the outlook for the economy. Oil prices have risen to a monthly high, weighing on the economic outlook while increasing the risk of higher inflation

Higher oil prices are reinforcing expectations that the Bank of England will tighten monetary policy later this year. Markets are now fully pricing in a 25 basis point rate hike in November, with another increase expected in March 2027.

Meanwhile, the U.S. dollar has fallen to a monthly low after softer-than-expected CPI and PPI data this week, which followed last week's weaker labour market report. Together, the data have prompted investors to rule out a July rate hike from the Federal Reserve.

Markets now price around a 70% probability of a 25 basis point rate hike in September.

However, downside in the dollar could prove limited. Renewed U.S.-Iran hostilities could support safe-haven demand for the greenback, while rising oil prices risk reigniting inflation concerns and lifting Treasury yields.

Attention now turns to today's U.S. retail sales report, which is expected to show sales rose 0.2% month-on-month in June after 0.9% growth previously. A stronger-than-expected reading could lend support to the dollar.

GBP/USD Forecast – Technical Analysis

GBP/USD has recovered from the 1.3200 support zone, breaking above both the 200-day SMA and the multi-month falling trendline to reach a high of 1.3550.

The breakout, together with the RSI holding above 50, keeps the near-term technical outlook constructive.

Buyers will look to extend gains towards 1.3600, followed by 1.3650, the May high. A move above there would bring 1.3800 into focus.

Initial support is seen around 1.3500, where the former trendline resistance has become support. A break below this level would expose the 200-day SMA near 1.3400, followed by horizontal support at 1.3340. Below there, sellers could target the 1.3200 support zone.

Oil Steadies Near $80 as U.S.-Iran Hostilities Remain in Focus

Oil prices are holding near a monthly high, with WTI trading around $80 per barrel, as renewed tensions between the U.S. and Iran continue to underpin the market.

The U.S. reimposed a naval blockade on Iranian ports earlier this week, while Tehran has threatened to disrupt more regional energy exports as tensions between the two sides continue to escalate.

Although geopolitical risks remain supportive of crude prices, the market has paused after the sharp rally earlier this week.

Shipping through the Strait of Hormuz remains well below normal levels, with just seven vessels transiting the waterway on Wednesday, down from 13 a day earlier.

At the same time, mediation efforts by neighbouring countries continue. The fact that oil prices have stabilised around current levels suggests investors are not yet pricing in a full-scale regional conflict.

However, a geopolitical risk premium remains firmly embedded in the market. Any signs that Iran could use its Houthi allies in Yemen to disrupt shipping through the Bab el-Mandeb Strait would likely add further upward pressure to oil prices.

Looking further ahead, oil prices could remain elevated into the fourth quarter if export flows continue to recover only slowly, particularly with global inventories already depleted following substantial drawdowns during the second quarter.

Conversely, a sustained easing in tensions alongside a faster recovery in production could see crude prices move back towards the $60 area by year-end.

Oil Forecast – Technical Analysis

After breaking below its symmetrical triangle pattern and the 200-day SMA, oil found support around $67 before staging a strong recovery.

The price has now reclaimed the 200-day SMA and is testing key resistance around $80, where the psychological level coincides with the April low and the 61.8% Fibonacci retracement of the move from $55 to $120.

With the RSI above 50, buyers will look for a break above $80, which would expose $88, where the 50-day SMA, the falling trendline resistance and the 50% Fibonacci retracement converge. Above there, $95 comes into focus.

Failure to overcome the 50-day SMA could see support tested around the 200-day SMA at $74.40. A break below there would shift attention back towards the $67-$70 support zone.