GBP/USD, Oil Forecast: Two trades to watch

GBP/USD falls after retail sales drop

• UK retail sales fell -0.9% MoM in September vs +0.4% in Aug.
• Evidence mounts that consumers are feeling the impact of 14 rate hikes
• GBP/USD tests 1.21, the weekly low

GBP/USD is falling and is on track to fall across the week, marking the second straight weekly decline and the 6th weekly drop in seven weeks.

The pound is falling after UK retail sales data fell by more than expected in September owing to unusually warm weather, which put shoppers off spending on winter clothes and as household budgets remain under pressure.

Retail sales tumbled 0.9% MoM in September after rising 0.4% in August. Expectations had been for a 0 .4% drop.

The data comes after UK consumer confidence plummeted, wage growth eases, and unemployment ticks higher.

While data this week showed that inflation remained sticky in September, weaker retail sales could suggest that consumers are feeling the impact of the BoE’s 14 consecutive interest rate hikes, slowing demand.

The data comes ahead of the BoE interest rates decision on the 2nd of November. The market expects the central bank to keep interest rates at 5.25%, the highest level since 2008. Recent speeches highlight divisions between BoE policymakers. While inflation is still over three times the BoE’s target of 2%, the lag effect means that only some of the rate hikes enacted may have filtered through to the economy.

On the other side of the equation, the US dollar pushes higher against a basket of currencies after losses in the previous session as investors digested Federal Reserve Jerome Powell's speech before the Economic Club in New York. Powell said that inflation is still too high and lower economic growth is needed to slow to bring inflation down. Yields and the USD fell during the speech.

Still, the US 10-year treasury yield has rebounded to 5%, a level it hasn't seen since 2007, after strong data across the week and on expectations that the Fed will keep rates higher for longer.

There is no high impacting U.S. economic data later today; attention will be on Federal Reserve speakers.

GBP/USD forecast – technical analysis

GBP/USD failed to rise above the 20 sma earlier in the week and rebounded lower, falling to 1.21, a weekly low. The RSI below 50 supports further downside.

Sellers will look to break below 1.21 to test 1.2040 the October low, before 1.20, the psychological level.

Any recovery must rise above the 20 sma at 1.2180 to open the door to 1.2220, the weekly high.

Oil rises across the week as Middle East tensions rise

• Oil rises ahead of an expected ground invasion by the IDF into Gaza
• A temporary easing of sanctions on Venezuela could limit gains
• Oil heads towards 90.00

Oil prices are heading higher and are set to book gains across the week, marking the second straight week of gains, amid rising concerns that the Israel-Gaza conflict could spread in the Middle East, disrupting oil supplies from the region.

Israeli troops gathered on the Gaza border and could start a ground invasion into Gaza this weekend.  Meanwhile, a US warship shot down missiles fired by Iranian-backed rebels overnight, increasing anxiety about the conflict broadening and raising the geopolitical risk premium on oil prices.

As well as the conflict in the Middle East, oil prices have also been supported by forecasts of a widening supply deficit in the fourth quarter after Saudi Arabia and Russia extended supply cuts to the end of the year and amid low inventories, particularly in the US.

Washington is looking to buy 6 million barrels of oil to replenish the strategic petroleum reserve after releasing millions of barrels earlier in the year.

Meanwhile, a temporary relaxation of U.S. oil sanctions on Venezuela could help ease concerns over supply disruption from the Middle East. A deal between the Venezuelan government and the opposition for fair elections in 2024 spurred the move.

Looking ahead, the Baker Hughes rig count data and speeches from Federal Reserve officials will be in focus.

Oil forecast – technical analysis

Oil rebounded off the 50 sma, pushing above the 20 sma and the multi-month rising trendline resistance to 89.55. This, combined with the RSI above 50 keeps buyers hopeful of further upside.

Buyers will look for a rise above 90.00, the psychological level, to bring 92.50, the September 19 high, into play, ahead of 94.60 the 2023 high.

Failure to break above the weekly high could see sellers test the rising trendline support, ahead of 88.75 the 20 sma.