Busier Data Week Might Be Bruising

GBP/USD Forecast: Bearish

• The Pound has been hit by general Dollar strength as markets re-price Federal Reserve Action
• However it remains quite high by the past two years’ standards
• The underlying UK economic picture might be about to get less friendly

The British Pound is heading into a week which will see some more likely domestic-data trading cues than the past few sessions, but the United States Dollar will remain firmly in the driving seat.

The US Federal Reserve’s view that it doesn’t yet have a full enough inflation picture to let it cut interest rates in March gave the Dollar a cross-board boost, and that’s quite fair enough. However, the Fed’s dilemma is writ at least as large for many other central banks, and certainly for the Bank of England.

The last monetary policy meeting in London resulted in a rare, three-way voting split on the nine-member Monetary Policy Committee, with one member, at last, voting for a rate cut.

However, MPC member Catherine Mann said on February 8 she is worried that Red Sea supply chain disruptions could result in stickier inflation in the UK, as increased costs are quickly passed on to consumers.

More broadly it’s clear that the UK’s inflation problems are still worse than the US’ and that interest rates are likely to remain higher for longer in the former even if they end up tracking the Fed lower over time.

That’s probably one reason why the Pound remains relatively high compared to the past two years’ action, even as the Dollar has strengthened of late.

The coming week will offer a good look at the UK economy, with official inflation and Gross Domestic Product and average earnings figures all due. Core inflation was running at an annualized 5.1% in December, well above the BoE’s 2% target but still clearly relaxing from its 7.1% May peak. Any signs of stickiness will likely see the Pound supported although the psychological effect of any slide below the 5% mark could equally see the markets’ rate-cut hopefuls selling the Pound, even if the effects of that don’t last long.

However, the balance of probability is that this week’s data dump will show a rather anemic economy still wrestling with elevated inflation. As this is unlikely to be great for the Pound, it’s a cautiously bearish call this week.

GBP/USD Technical Analysis

GBP/USD Daily Chart Created Using TradingView

This longer-term chart shows how elevated GBP/USD remains and, although the UK’s fundamentals might suggest a degree of vulnerability at these levels, the likely inflation/interest rate comparison with the US probably leaves the pair looking a little more rationally priced.

It’s clear that the first Fibonacci retracement of the long rise up to last July’s peaks from the lows of late September 2022 remains very much in play as a support level, as indeed it has since November. It comes in just a whisker above the 1.25 level.

It will be interesting to see what would happen if the uptrend from those 2022 lows were to coincide with that retracement, as it seems it’s about to do in a very few days. A fall below both might be quite bearish for Sterling and put support from November 10 at 1.2146 back in play for the bears.

However, for now it’s probably better to play the range, which has after all endured for nearly four months now. That leaves GBP/USD stuck between that retracement point and late December’s high of 1.28117.

–By David Cottle For DailyFX