GBP/USD forecast: Cable looking to bounce back

The US dollar turned positive against most major currencies after a weaker start, even though today’s US data mostly disappointed expectations. Nevertheless, the focus remains on optimism about the end of Ukraine war, while Trump’s softer tone towards tariffs is also helping to soothe investors nerves a little. Among the major currencies that have benefited from the recent US dollar weakness has been the pound, which in turn has been supported by stronger UK economic data this week. We have seen stronger-than-expected UK retail sales, services PMI, CPI and wage growth this week. Therefore, the near-term GBP/USD forecast remains modestly bullish.

Disappointing US data could keep US dollar under pressure

The initial dollar weakness turned into strength and despite most of today’s US data coming in below expectations, this hasn’t been able to offset fears about inflation. Those concerns have been stoked ever since Trump took office due to his protectionist policies. And today, we saw the US long-term inflation expectations hit a 30-year high in the University of Michigan survey, printing 3.5% - that’s what consumers think inflation will be 5 years from now. The 1-year inflation expectations remained at 4.3% as expected

Today’s other data releases were soft. The S&P Global flash services PMI fell back into contraction at 49.7, down sharply from 52.9 the month before and against expectation of 53.0. Then we had weaker-than-expected existing homes sales falling 4.9% month-on-month (4.08 million vs. 4.13 million expected) and revised data showed the UoM Consumer Sentiment index falling to 64.7 from 67.8 reported initially.

Looking ahead: US GDP and core PCE coming up next week

With the US data weakening, the odds of a sooner rate cut from the Fed have increased marginally. Look ahead to next week, while we will have plenty of second-tier data here and there, the key one for the dollar will be the PCE price index, due on Friday, February 28. This is the Fed’s preferred measure of inflation, making it a particularly crucial release. Last week’s CPI and PPI figures both came in hotter than expected, yet the dollar struggled to capitalise on the stronger inflation data as tariff concerns eased. Notably, it was certain PPI components—such as healthcare and insurance costs—alongside a sharp decline in airline fares, that helped temper inflation worries. These figures suggest Core PCE is likely to soften to 2.6%, down from the previous estimate of 2.8%.  Meanwhile, the second estimate of US Q4 GDP is also set to be released a day earlier on Thursday, which may also impact the US dollar.

Ukraine optimism should keep USD undermines in short-term

Outside of the economic data, it will about investors pricing out the risks of tough tariffs and Ukraine war premium. Optimism surrounding peace negotiations in Ukraine has provided a big boost to the European markets, even if sentiment has taken a slight knock in recent days amid tariff concerns and a brewing dispute between President Donald Trump and Ukrainian President Volodymyr Zelenskiy. That said, hopes remain that a deal could eventually be reached.

Technical GBP/USD forecast: key levels to watch

Source: TradingView.com

The higher highs and lows on the chart of the cable means the technical GBP/USD forecast is still bullish despite today’s mild selling. Key support in the short-term comes in around 1.2630-1.2640, which was resistance before. It needs to hold to keep the bulls happy.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R