- GBP/USD bulls have pushed the pair above 1.2500, but bears are still in control of the trend.
- The key resistance level to watching is 1.2568. so far, if US inflation data comes in below expectations on Wednesday, GBP/USD could break out of its recent range and head higher.
GBP/USD has been in a short-term recovery since late April, but it is too early to say that the trend has turned. The dollar is still the dominant force in the market, and many analysts believe that it will remain strong in the coming weeks and months. However, this assumption will be put to the test if US inflation data this week disappoints.
Therefore, the fate of the pound sterling depends largely on what happens to the US dollar, which means that the key to its continued rise depends on what happens in the US economy. For the US dollar to advance to new highs in 2024, we need signs that the economy is still hot and for inflation above consensus to undermine expectations for 2024 rate cuts.
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According to the Economic Calendar data, this could happen if the US CPI and retail sales data on Wednesday comes in above expectations: inflation is expected to be 3.4% year-on-year (0.3% month-on-month) and retail sales are expected to be 0.4% month-on-month.
If this data comes in weak, GBP/USD could break above the 200-day moving average at 1.2541 and is likely to end the week higher. Obviously, a break above the 200 DMA would be an increasingly bullish technical development that would increase the chances of further gains in the rest of the month, potentially opening the door to levels above 1.26.
Back in the UK, sterling felt last week as investors prepared for the Bank of England to signal that it is close to cutting interest rates, which was ultimately confirmed in the Monetary Policy Decision and Directions on Thursday. The bank says it will carefully consider the next two points of wages and inflation before deciding whether a June rate cut is appropriate. Furthermore, if the key wage figures from the ONS today come in weaker than expected, look for a resumption of sterling weakness in the coming days. The more the market expects a June rate cut, the more downside we can expect in sterling, all other things being equal. Finally, market implied odds for a June rate cut are now up to 45%, which means there is plenty of room for repricing that could affect the exchange rate.
However, if wage growth is higher than the 5.3% y/y that the market is expecting, look for a nice rebound in GBP towards 1.26, especially if US data comes in close to target or below target.
Technical forecasts for the GBP/USD pair today:
The GBP/USD price may be declining, as the pair is forming a head and shoulders pattern on the hourly time frame. Technically, the price has yet to test the neckline around 1.2500 to confirm that selling is underway. Also, the 100 SMA has already crossed below the 200 SMA to indicate that the overall trend remains bearish or that support is more likely to break than to hold. In this case, GBPUSD could fall as high as the formation or around 100 pips. At the same time, the stochastic appears to be moving lower to reflect bearish pressure, although the oscillator is also moving sideways to indicate consolidation. Ultimately, the RSI is moving sideways but has some room to head down, so price could follow suit while downward pressure remains.
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