- GBP/USD booked second straight weekly advance as the Fed disappointed.
- US recession fears loom ahead of NFP while BOE is set for a 50 bps rate hike.
- Daily technical setup favors bulls, with a test of 1.2500 likely on the cards.
GBP/USD witnessed a second consecutive week of gains, as the recovery momentum continued amid an extended correction in the US dollar across the board. The monetary policy divergence between the Fed and BOE narrowed while recession alarms rang in the US and the Eurozone. All eyes are now on the BOE rate hike announcement and the US Nonfarm Payroll in the week ahead for fresh directional impetus.
GBP/USD: What happened last week?
It was all about the Fed rate hike decision and whether the US economy will tip into a technical recession. The US dollar, however, failed to capitalize on tepid optimism at the start of the week and meandered near two-week lows. On the other hand, Friday’s better-than-expected preliminary UK S&P Global PMI reports ramped up bets for a 50 bps BOE rate hike in August and offered legs to the ongoing recovery in cable from 28-month troughs. The UK Manufacturing PMI eased to 52.2 in July but bettered estimates while Services PMI also surpassed expectations and arrived in at 53.3. Earlier this month, the UK employment and inflation data both showed renewed optimism on the economy.
The uptrend in the major was bolstered by a less hawkish Fed outcome after the world’s most powerful central bank abandoned its forward guidance and adopted a meeting-by-meeting approach, in the face of slowing economic activity. The Fed rasied the key policy rates by 75 bps, as expected, to 2.25%-2.50%. Fed Chair Jerome Powell dismissed that the economy is in a recession when probed on multiple occasions during the post-policy meeting press conference.
However, the second straight quarter of negative US GDP print confirmed a technical recession. The US economy contracted at an annual pace of 0.9% in the second quarter of this year when compared to a 0.5% growth expected and -1.6% booked in Q1. The US dollar sell-off extended alongside the turmoil in the Treasury yields, as the US GDP contraction threw hopes for a 75 bps September Fed rate hike out of the window. According to the CME FedWatch Tool, the probability of a 75 bps rate hike by the Fed in September now stands at 22% vs. roughly around 40% pre-GDP release. Upbeat earnings from Amazon (AMZN). and Apple (AAPL) lifted the overall market mod on the final trading day of the week, which weighed further on the safe-haven buck. Amidst unrelenting dollar bears, GBP/USD clocked monthly highs above 1.2200.
The data published by the US Bureau of Economic Analysis revealed on Friday that the Core Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred gauge of inflation, edged higher to 4.8% in July from 4.7% in June. This reading helped the dollar stage a rebound and caused GBP/USD to retreat below 1.2200 ahead of the weekend.
The BOE and NFP week ahead
With the all-important Fed rate hike decision out of the way, investors now brace for the BOE interest rate decision and the US Nonfarm Payrolls, which will have a significant impact on cable in the week ahead.
The big week will see a relatively quiet start, with the final UK S&P Global Manufacturing PMI dropping on Monday, followed by the US ISM Manufacturing PMI. The US data will be closely watched, especially after the downbeat US S&P Global Preliminary Manufacturing PMI release.
Tuesday is data-scarce, with the only US JOLTS Job Openings due on the cards. The final UK S&P Global Services and US ISM Services PMI will be reported on Wednesday. The US Factory Orders will also entertain traders.
It’s a ‘Super Thursday’ on August 4, as the BOE will announce the expected 50 bps rate hike. The rate decision will be accompanied by the meeting minutes and followed by Governor Andrew Bailey’s press conference. The recent slew of upbeat UK economic news is expected to ease off the pressure on the BOE, as it can continue its fight to tackle inflation without worrying about the growth uncertainty. Cable’s additional recovery will depend on the central bank’s rate hike guidance.
Besides, the US will see the weekly Jobless Claims data on Thursday, which is gaining attention after unemployment claims hold near the highest level of the year, although below the 300K key level. Worsening US jobs data could put Fed Chair Jerome Powell in a tough spot. Fed policymaker Loretta Mester will also make an appearance on Thursday.
The week will wrap up with the critical US NFP data, which will be key to gauging the Fed tightening expectation in the coming months. BOE Chief Economist Huw Pill will speak about the latest interest rate decision at the Monetary Policy Report National Agency Briefing.
GBP/USD: Technical outlook
GBP/USD closed above the 21-day SMA for fice straight days. Additionally, the Relative Strength Index (RSI) indicator on the daily chart holds above 50 despite edging slightly lower on Friday. Although both of these technical developments suggest that buyers remain in control of the pair's action, strong resistance seems to have formed near 1.2280, where the Fibonacci 23.6% of the latest downtrend and the 50-day SMA align. In case this level turns into support, the pair could target 1.2400 (static level, psychological level) and 1.2500 (psychological level, Fibonacci 38.2% retracement).
On the downside, a daily close below 1.2200 (20-day SMA, psychological level) could be seen as a significant bearish sign and open the door for additional losses toward 1.1900 (psychological level, static level) and 1.1800 (the end-point of the downtrend).
GBP/USD: Forecast poll
FXStreet Forecast Poll shows that experts are yet to be convinced about GBP/USD's potential to build on this week's gains. The average targets on the one-week and one-month views sit at 1.2189 and 1.2126, respectively.
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