GBP/USD Faces Key Week as Focus Turns to UK CPI
The GBP/USD could face a volatile week due to the publication of several UK economic data releases. There aren’t many scheduled events from the US that could impact the GBP/USD forecast this week. This may prevent the US dollar from rebounding too significantly after it put in a good performance on Friday. Thus, the GBP/USD could climb back above 1.25 handle, if the upcoming UK data releases underscore the need for the BoE to tighten interest rates further.
- * All eyes on UK CPI
- * Not much data from US but plenty of company earnings
- * GBP/USD’s drop below 1.25 could be short-lived
UK CPI main focal point for GBP/USD
Among this week’s data dump from the UK are the latest wages and inflation figures to be released in mid-week. This means that UK inflation will be back in the spotlight.
The last UK CPI report took everyone by surprise. Instead of falling under 10% as had been expected, it accelerated to 10.4% from 10.1% previously. Core CPI had an even larger deviation as it climbed to 6.2% from 5.8%, when a slight drop was expected.
The Bank of England’s battle to tame inflation should therefore continue if we don’t see a significant drop in inflation on Wednesday. So, the BoE could raise interest rates one final time to 4.5% at its next meeting on 11th May in that event.
Dollar’s revival could be short-lived
The US dollar index fell for a fifth consecutive week against a basket of currencies last week. On Friday, however, it managed to trim those weekly losses sharply as the greenback found support on the back of comments from the Fed’s Christopher Waller, who is a hawk anyway. Economic data from the US remained mixed. Retail sales slumped 1% against a forecast of a smaller decline, while CPI (5% y/y) and PPI (2.7%) both came in lower than expected. However, consumer sentiment improved more than expected, adding to the stronger non-farm jobs report from the week before – the week when almost all other employment indicators had disappointed expectations.
This week, there is not much in the way of key data on the US economic calendar to impact the GBP/USD forecast. Consequently, I doubt that there will be much follow-through in the dollar’s recovery and why I think the cable could head back above 1.25 handle soon.
Like many other central banks, the Fed is nearing the end of its rate-hiking cycle. It looks like a final 25 basis point rate hike is priced in for May. The Fed will then likely hit the pause button to assess the impact of the past rate hikes.
What key events will impact GBP/USD this week?
We have already seen the release of the first data release relevant to the GBP/USD pair, namely the Empire State Manufacturing Index. This came out better than expected at 10.8 vs. -17.7 eyed, providing support for the dollar.
This week’s other data relevant to the GBP/USD include Tuesday’s publication of US Building Permits and Housing Starts – although these are unlikely to provide too much volatility.
Obviously, there will be several other key events that could impact the wider markets. Among them are China’s first-quarter GDP data, due out on Tuesday.
We will also have lots of earnings announcements from big American companies, which could impact the major indices and provide indirect volatility in FX markets. Some of the big names to watch include Tesla, Netflix, easyJet and Goldman Sachs.
GBP/USD maintains bullish trend for now
The GBP/USD reached 1.25 handle last week and was again unable to hold there, similar to the week before. The cable closed the week flat after its earlier gains were wiped out in one big move on Friday. But the underlying trend remains positive, which is why we will be continuing to watch for bullish signals to emerge again this week, rather than focusing too much on a couple of bearish technical indications. Granted, these tentative bearish signs could turn out to be something more significant, but more price action is needed before we can confidently conclude that the bullish trend has ended.
Indeed, the GBP/USD is continuing to hold above the still-rising 21-day exponential moving average, which is objectively telling us that the short-term trend is bullish. What’s more, price is holding comfortably above the 200-day simple moving average, which is an objective way of confirming that the longer-term trend is also bullish.
The GBP/USD is now back below its prior range-high of around 1.2450. This level is now very important. A daily close back above 1.2450 in the coming days would re-instate the short-term bullish trend. If that happens, we could see the onset of a rally towards high 1.20s.
However, if the GBP/USD goes below the shaded blue area first, and thus break key short-term support in the range between 1.2265ish to 1.2390ish, then this would put the bulls in a spot of bother. In this case, a move back towards 1.20 would become likely.
As things stand, we are leaning towards the bullish side of the argument given the recent price structure.
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