- We anticipate further losses for the GBP/USD pair this week, but we believe the decline will be limited to the 1.3036 support level.
- Currently, the GBP/USD is trading around 1.3075 at the time of writing this analysis.
- Overall, it's a busy few day for the GBP/USD exchange rate, as an important UK jobs report and US inflation figures are due to be released, both of which will guide the outcome of decisions at the Bank of England and the US Federal Reserve later in September.
Facing the economic calendar risks, the pound is under short-term pressure against the dollar. The GBP/USD pair fell below the important psychological level of 1.31 on Monday, as the strong sell-off we witnessed on Friday extended into the new week. This move is driven by an adjustment in expectations for US interest rate cuts by the Federal Reserve, as the market has lowered the probability of a 50 basis point US interest rate cut on September 18, now favouring a more traditional 25 basis point move.
Overall, the extent of the sell-off will be determined first and foremost by how long the US interest rate outlook continues to be revised. The market entered September with high hopes for a rapid and aggressive easing cycle from the Fed, but the reality has become clear that the US economy is too healthy to warrant such an easing in policy expectations.
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Technical forecasts for the GBP/USD pair today:
The net result is a stronger dollar, and the immediate support for the resulting weakness in the GBP/USD pair is now at 1.3087, a horizontal graphical support from which the GBP/USD pair rebounded last week. As we have seen it come into play in late August, there is a chance for some buyers to intervene here.
However, we are looking at a lower level at 1.3036 as a more important support area, as this level represents a 23.6% Fibonacci retracement of the significant rally we saw from April to August. Furthermore, we note that Fibonacci retracement lines in this broader multi-month move have a degree of predictive power, and we will add them to our toolkit as a result. Note that upon reaching the 1.3036 level, the best price for the dollar for individual buyers will start to slip to the 1.29 level.
The pound is likely to dominate the proceedings on Tuesday with the release of UK jobs and wages figures. The market expects employment to rise by 84,000 jobs in the three months to July, with an unemployment rate of 4.1%. However, UK jobs figures will be of greater importance for the pound, as this is what the Bank of England will be watching closely. The bank is not expected to cut rates again, but there is some debate about whether it will move again in October and November.
Overall, weaker-than-expected wage data could strengthen the chances of a rate cut in October, which would negatively impact the pound. Average earnings are expected to rise by 4.1% in the three months to July, down from 4.5%. Wage pressures have eased, but some economists are concerned that they are not falling fast enough. If this is the case, the data could beat expectations and reduce the chances of a rate cut in October, which could strengthen the pound against the euro and other currencies. According to analysts, "Another decline in nominal wages could ease inflation concerns in the UK and allow the Bank of England to cut rates later this year, although we still expect them to cut rates at a slower pace than the European Central Bank and the Federal Reserve."
Tomorrow, Wednesday, will see the release of the UK’s GDP figures for July, with the market expecting a 0.2% growth, up from the flat 0% growth in the previous month. Theoretically, the GDP figure ranks second after the wage data release, but any significant surprises (more than 0.2%) could shake the market, potentially weakening the British pound in case of any disappointments and strengthening it in the event of any unexpected growth.
The biggest release of the day is the US monthly inflation report, due at 13:30 GMT, and given the importance of global drivers, this could end up being the highlight of the week for sterling exchange rates. If US inflation comes in below expectations, market expectations of a 50bp rate cut by the Fed on September 18 will increase, boosting equity markets and supporting sterling against the euro.
However, if the data comes in stronger, expect more selling pressure, as the odds of a 50-basis point cut will be erased, potentially putting further pressure on stocks and the British pound.
Last week, we heard from an influential member of the Federal Reserve’s rate-setting committee that, while U.S. rate cuts are necessary, the path forward remains data-dependent. Consequently, markets interpreted this as a sign that the Fed isn’t concerned enough to pursue a 50-basis point cut and would prefer sticking to more traditional 25 basis point adjustments. This view could shift if inflation numbers exceed expectations, increasing the likelihood of another strong week for the U.S. dollar.
Analysts also note that September is historically a month when global stocks decline, which could keep the pound under pressure in the coming three weeks, in line with this adjustment. However, we believe that supportive UK rate expectations could limit the downside for the GBP/USD pair, and we still view any weakness as part of a larger cyclical trend toward appreciation, which will eventually return.
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