GBP/USD outlook: US dollar in sharp focus

The GBP/USD has been stuck around the 1.2700 handle in the last couple of weeks. While the pound may not move much with the BoE rate decisions taking place in early August, shortly after the FOMC rate decision, the dollar will be tested however with the release of some top-tier data in the coming days. We will have the closely-followed ISM services PMI on Thursday, followed by the June nonfarm payrolls report, while the latest CPI report will be published next week. Together, these data releases should be the deciding factor behind a hike or hold in US interest rates later this month. For now, our GBP/USD outlook is neutral, but barring any big downside surprises in US data, we think there is increased risk of a short-term pullback – even if the cable has not yet shown any signs of a bearish reversal yet.

GBP/USD outlook: All eyes on US data

It has been a quiet week in FX markets so far, but thankfully US markets will reopen today, and volatility should pick up as a result. The focus will be on FOMC meeting minutes, although they are unlikely to tell us anything different to what we have already heard from several Fed officials that have spoken since their meeting in June. More important for the dollar will be incoming data. Unfortunately, there are not many macro pointers scheduled for release today, with factory orders being the exception. We will have ISM services PMI and ADP employment data on Thursday to look forward to, before the focus turns to the nonfarm jobs report on Friday.

FOMC June meeting minutes

Wednesday, July 5

19:00 BST

We will have the minutes from the June FOMC meeting to potentially provide some spark later on. But if you are looking for any hints of dovishness from the Fed, you probably won’t find that in the minutes. With the Fed being pretty much data-dependant, any major weakness for the greenback would have to come from incoming data. On that front, we have lots to look forward to in the second half of the week…

ISM services PMI

Thursday, July 6

15:00 BST

On Monday, we saw the ISM manufacturing PMI come in well below expectations again (41.8 vs. 44.0) as activity contracted at a faster pace in June compared to May. It dropped to its lowest level since May 2020, at the height of the pandemic.

While the manufacturing sector activity has been weakening, the services PMI has remained above the expansion level of 50.0 for the past three months – albeit, just above. If we start to see renewed strength come into the services sector despite high interest rates, then this should keep the doves at the FOMC quiet for another couple of months at least.

However, if the services PMI also turns lower, then this will raise recession alarm bells, and potentially weigh on the dollar.

US non-farm payrolls report

Friday, July 7

13:30 BST

Last week’s data releases were mostly positive, pointing to an economy that is continuing to defy expectations – until the manufacturing PMI indicated otherwise. The jobs market has been particularly strong with nonfarm payrolls data beating expectations in the last 14 months in a row! Will that trend continue? If it does, it will mean interest rates will likely remain higher for longer. This could benefit the US dollar in the short-term, even if high rates for longer might be something that could ultimately hurt the economy at some later point in time.

GBP/USD outlook: technical analysis

The technical GBP/USD outlook remains bullish given the higher highs and higher lows. The area around 1.2700 was previously support before last week’s breakdown. We are now back above this zone and for as long as the bulls can cling on here, we might see some follow-up buying to push us to a new high for the year above 1.2850. But a closing break below 1.27 handle is what the bears would be looking for to push rates below 1.2600 support. So, watch the closing print carefully today, as it could determine the directional bias for the next couple of days.

Source: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R