GBP/USD outlook hinges on BoE, US data - Currency Pair of the Week

The GBP/USD was little changed for much of Monday’s European trade, holding in the positive territory above 1.2850 area. But we are expecting volatility to increase as we go deeper into the week. As well as the Bank of England’s rate decision, we have some top-tier US data to look forward to in the next several days, making the GBP/USD the currency pair of the week.

GBP/USD outlook: Will the dollar resume higher?

Investors are wondering whether the US dollar has bottomed out, at least temporarily. There’s certainly a risk the greenback could gain more ground ahead of a busy week, after closing higher for the second consecutive time last week against a basket of foreign currencies.

The greenback has found renewed strength in recent days thanks to data highlighting the resilience of the world’s largest economy, where signs of disinflation have been offset by strength in consumption, suggesting that a severe recession can be avoided, even with interest rates at 5.5% -- the joint highest with New Zealand among the developed economies.

In the eyes of the Fed, monetary policy is quite restrictive now, and further rate increases might be avoided. But with the world’s largest economy holding its own relatively well, this means monetary policy may remain restrictive for longer than perhaps some other important economic regions around the world.  

There’s about 2 months until the Fed meets again, which means a lot can change in the interim in terms of data. Inflation is obviously in focus. But the Fed will also keep an eye on other macro indicators in determining whether to hike further. Speaking of…

Key data highlights for the GBP/USD pair this week

On Tuesday, the focus will be on the ISM manufacturing data, given the weakness we have seen in the sector across the developed economies. We will have the ADP private sector payrolls report on Wednesday, followed by the ISM services PMI on Thursday and then – the big one – the official nonfarm payrolls report on Friday.

The dollar’s bullish momentum faded somewhat on Friday, though, after the Fed’s favorite inflation measure – core PCE – came in a touch softer, although this was offset by a stronger-than-expected personal spending print, which was up 0.5% month-on-month. The PCE Core Deflator came in at 4.1% y/y/ vs. 4.2% expected.  Earlier last week, we saw US GDP expanding +2.4% in the second quarter, more than +1.8% expected. We also had better-than-expected Jobless claims data.

Meanwhile, from the UK, we will have the Bank of England’s interest rate decision to look forward to on Thursday. The BoE is widely expected to raise rates by 25 basis point to 5.25, although there is a risk of a repeat of June's surprise 50 bps hike – because of the fact that UK inflation is much higher than it is in other big economies.

GBP/USD outlook: Technical analysis

Source: TradingView.com

The GBP/USD has struggled to hold above the key 1.30 handle in recent weeks. Last week it nearly got there before being slammed down on Thursday, when it created a large bearish engulfing candle – the clearest signal yet that rates may have created at least a temporary top.

Following Thursday’s sell-off, the GBP/USD broke below a short-term bullish trend line that had been in place since early June, last week.

But what is lacking since Thursday is some downside follow-through. Will the sellers step up as we head deeper into the US trading hours? If not, this won’t necessarily mean the sellers will not come in later in the week, but it will probably reduce the appeal of shorting the cable for the bears.

The clear invalidation point is now Thursday’s high at just shy of 1.30 handle. If rates were to cross that level again, then the bearish bias would become completely invalidated.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R