- For the second week in a row, the GBP/USD pair has been completing its strong downward correction path, which has pushed it towards the 1.2425 support level, its lowest in five months.
- The strong downward pressure is attributed to the US dollar, which is responsible, but the pace of recent advances may be a case of "too fast, too early" and there could be a potential pullback this week.
Commenting on GBP/USD performance, Shaun Osborne, Senior FX Analyst at Scotiabank, says: "The technical bearish close for sterling during the week, and perhaps more importantly, the clear break below the 1.25 support area that had underpinned sterling for several months leaves sterling vulnerable to further weakness." "Support lies at the 1.2465 area - a 50% retracement of sterling's Q4 rally. However, a return to the 1.22/1.23 range is a risk."
According to forex trading platforms, the driving force behind the US dollar's advance was the massive repricing in Fed expectations that followed Wednesday's US inflation report, which ignited volatility and pushed the dollar higher. Markets have ruled out a Fed rate hike in June and are now seeing only one or two Fed hikes in 2024, while maintaining expectations for the Bank of England and other central banks to cut rates more aggressively.
The US dollar's strength is only being reinforced by the creeping fear sweeping through equity markets that the 2024 rally must give way to the realities of a higher US interest rate regime for a longer period. We need to respect this repricing process, and the recent momentum could lead to further US dollar gains this week. However, with jobs and inflation reports behind us, we believe the catalysts needed for further significant gains will be lacking, and this could provide some welcome support for sterling in this week's trading.
According to the results of the economic calendar data, we will watch the release of US retail sales at the start of the week and any strong reading here will only confirm that strong consumer demand is driving the ongoing rise in inflation. Moreover, the recent US dollar advance could extend if the data beats the consensus 0.3% month-on-month forecast.
Today, we are looking for volatility in GBP/USD as important UK wage figures for February are released. The Bank of England has been cautious about cutting rates for fear that wages are running too high and supporting domestic inflation rates. If the figures come below expectations, the market will be more comfortable with the idea of a June rate cut, which could weaken GBP/USD. Also, Tuesday sees a speech by Bank of England Governor Andrew Bailey, which will give him the opportunity to address the issue of potential rate cuts by the bank in the coming months.
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There is no BoE decision scheduled for April, making this speech important as it will serve as a bridge to the May meeting. Any sign of increased confidence in the possibility of cutting rates without triggering inflation is likely to weaken GBP/USD. Wednesday brings another appearance by Bailey and a speech by fellow MPC member Haskel. The most important inflation data out of the UK on Wednesday will be the focus of the forex market this week: needless to say, any downward revision from expectations will weigh on the British currency.
Any reading above the consensus (consensus = 2.9% year-on-year) would give GBP/USD a boost as it would shift the balance of probabilities for the first rate cut from June to August, putting the BoE behind the ECB in terms of cutting rates. Therefore, the start of a rate-cutting cycle.
The week ends with the UK retail sales release, which, on several occasions in the recent past, has provoked a greater reaction to the pound than to inflation or wages. According to analysis from UniCredit Bank, British retail sales volumes are likely to rise by 0.6% month-on-month in March, supported by the early timing of Easter, which is likely to lift food sales.
Technical forecasts for the GBP/USD pair today:
The drop in the GBP/USD exchange rate below the 200-day moving average last week means that the pair is now in a downtrend according to the rules of this week's forecast for the British pound. Therefore, we see the broader trend for the currency pair to be lower from here, with highs considered counter-trend corrections that provide tactical opportunities. The chart attached shows that the price of the British pound has finally broken below the psychological support level of 1.25, which is considered a horizontal support line that defines the 2024 range, a development that also calls for further weakness. From the support level of 1.2380, cautious thinking about buying the currency pair will begin. Ultimately, considering that the reaction to the results of British economic data and the future of central bank policies will have an impact on the performance of the sterling dollar in the coming days.
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