- With sentiment still weak, GBP/USD has fallen to a one-month low of 1.2658 and is settling around 1.2700 at the start of trading on Tuesday.
- The pair’s losses come as investors await key economic data including CPI figures and the Bank of England’s policy meeting.
- Next Thursday, The Bank of England is expected to keep interest rates at 5.25%, following a previous decision to keep rates steady in May.
However, there is speculation that more MPC members may push for a rate cut. UK inflation is expected to fall to 2% in May, in line with the Bank of England’s target. On the political front, British Prime Minister Rishi Sunak faces challenges as recent polls show his Conservative Party losing ground ahead of the July 4 general election.
According to reliable forex trading platforms, the GBP/USD exchange rate faces three major tests this week: French political risk, UK inflation (Wednesday) and the Bank of England decision (Thursday).
Overall, European risk sentiment deteriorated last week as French bond yields rose on heightened political uncertainty and concerns over the country’s growing debt burden outlook. Clearly, this helped sterling to a 22-month high against the euro, but losses were recorded against the safe-havened US dollar. “The problem for Europe is the problem for sterling,” analysts said.
Markets are relatively quiet at the start of this week’s trading, suggesting that much of the bad news regarding France lies in the “price” and the euro may correct some of its recent losses in the coming days. This could help sterling recoup some of last week’s losses. However, sterling has been down for two weeks in a row against the US dollar and the short-term technical situation looks a bit difficult.
Technical forecasts for the GBP/USD pair today:
Technically, the Relative Strength Index “RSI” (figured at the bottom panel of the chart) is at 46 and pointing down, confirming the short-term momentum to the downside. Also, we note that GBP/USD fell through the 21-day moving average on Friday, confirming that the near-term trend may be lower. Likewise, we believe that the GBP price could fall to the 38.2% Fibonacci retracement level of the April-June rally at 1.2644. Furthermore, this is where the 100-day moving average comes in, which could provide support.
For now, weakness may be shallow and limited in the coming days, especially if the uptrend in global equity markets can be restored, and if French-inspired risks are contained. Ultimately, we look for a retest of the GBP/USD high of 1.2850 in the coming weeks as the global backdrop remains constructive amid expectations of a possible Fed rate cut in the fall.
If UK inflation data beats expectations this week and the BoE expresses caution over raising interest rates, GBP/USD could recover to 1.2750 before the weekend. In May, it was forecast that April’s inflation reading would beat expectations, and if it is correct again, such upside surprises are likely to boost sterling.
According to the economic calendar, the key figure to watch on Wednesday is the services inflation reading, as this is well ahead of levels consistent with the permanent decline in UK headline inflation to 2.0%. The BoE and other economists expect inflation to rise steadily over the rest of the year due to high levels of services inflation. Another reading above consensus would raise questions about how quickly the BoE can cut interest rates.
Furthermore, there are significant downside risks to the pound this week if UK inflation softens and the BoE is tipped to signal a rate cut in August. Currently, this is because the market sees less than a 50% chance of a rate cut in August, meaning there is scope for re-pricing in a negative direction for the pound.
At the same time, the pound is likely to fall below 1.2644 if this happens.
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