GBP/USD Weekly Forecast: Inflation report set to confirm the dark side of Sterling
|Sterling is set to end the fourth week of January flat against the US Dollar as the curse for the greenback persisted ignoring the positive macro picture for the US, proved resistant to Federal Reserve’s slightly hawkish turn and even rising US benchmark Treasury yields rising to 2.82% failed to attract the market enough buyers to see the US Dollar rising.
The macro summary for the GBP/USD saw little-to-no important news during the fourth week of January with exception of the Thursday’s manufacturing and Friday’s construction PMIs. With both figures falling lower in January past market expectations and the construction PMI decelerating at the bring of expansion territory, Sterling remained well supported by the fundamental weakness of the US Dollar.
Technically the GBP/USD fell below the support line formed by the upward rising trend channel at the beginning of the the fourth week of January, but it has managed to regain traction and to crawl up again in what looks like a parallel upward rising trend.
With the Super Thursday ahead on February 8, next week, it will take extra dovish Carney at the press conference after the fresh macro forecast is presented in the Bank of England’s Inflation Report to reverse the current uptrend. Maybe similar extra dovish Carney like in November last year, when the GBP/USD fell 180 pips to $1.3060 area within single trading day.
GBP/USD 15-minute chart
Technical Outlook
The big picture on the GBP/USD is still drawn by the past US Dollar underperformance. The US Dollar is is a steep downtrend against Sterling falling for 6-weeks in a row. The GBP/USD has actually broke above long-term channel resistance on the upside last week and the only power of the US January labor market report helped to bring the currency pair back to the previous upward rising channel.
Looking on a daily chart, the technical oscillators like Relative Strength Index and Momentum are pointing downwards with the Relative Strength Index falling lower from the Overbought territory. On the top of it the Slow Stochastics is also showing the bearish crossover in the Overbought territory indicating the price movement should continue lower in upcoming days.
GBP/USD 15-minute chart
With GBP/USD bouncing off lows below $1.4000 swiftly during the fourth week of January, there apparently is some strong market interest in selling US Dollars, regardless of the big macro picture favoring US.
Only break below $1.3830 representing long-term untrend Fibonacci retracement of 61.3% will mean that the current uptrend has been finally reverted. The most likely scenario for GBP/USD is that the currency pair will remain above $1.4000 level and that means that the bullisg trend is still in place.
GBP/USD daily chart
Week ahead
The Bank of England February Inflation Report headline next week with the Monetary Policy Committee expected to stay pat on both asset purchasing program as well as the interest rates that has just been lifted to 0.5% after the decade of falling lower.
The Bank of England is expected to remain traditionally conservative seeing only modest economic growth rate in the UK for the upcoming three years, although it might be a bit more positive than the International Monetary Fund with its 1.5% y/y prediction for both 2018 and 2019. This one of the things that the Bank of England governor Mark Carney advocated during the House of Lords grilling week before the Super Thursday.
Lords from the British parliament questioned reliability of the Bank of England forecasts that seemed to be too pessimistic in their eyes given the relatively resilient UK economy in the post-Brexit period. Carney downplayed the objectivity of such attitude saying the Bank of England needed to remain cautiously pragmatic and pointed out that the Bank’s forecast iof the UK GDP differs from the one issued by the IMF two weeks ago in Davos. The UK has been the only G7 country with the GDP forecast downgraded in the newest version of the World economic Outlook.
While growth outlook for the UK might be a bit more optimistic, the inflation outlook is the main determinant of the policy and I expect little changes on that front, even after the current strength of GBP is playing in favor of inflation falling faster towards the 2% inflation target. The latest inflation numbers showed the UK CPI rising less than expected by 3.0% y/y in December, but although the Bank of England may opt for tentative optimism in terms of inflation forecast, it is highly unlikely to alter its outlook of maximum two rate hike until 2019.
The UK economic calendar for February 5-9, 2018
On the other side of the Atlantic, the major macro event are already over. The Federal Reserve has kept the rates on hold in line with expectations and released slightly hawkish statement saying the outlook for growth isd “solid” while inflation in the US is set to return to the target in 12-months horizon. Adding to it was the positive tone of the January labor market report in the US that has seen number of new jobs added reaching above expected level of 200K while the unemployment remained steady at 4.1%. Most importantly the average earning rose 2.9% over the year, indicating consumers’ buying power will rise pressing on inflation to increase in favor of Fed’s target.
The US economic calendar for February 5-9, 2018
Week after the FOMC meeting will see regional Federal Reserve presidents from St. Louis, New York, Chicago, San Francisco, Dallas, Philadelphia and Kansas City speaking with all expected to express personal views on prospects for inflation and monetary policy that is unlikely to alter the path of future interest rate increases. Market is currently pricing in 90% chance of March interest rate hike by Federal Reserve and this is still not enough to push the US Dollar higher, even with the benchmark Treasury yields rising to 4-year high of 2.82%.
The hard data are expected to see ISM services PMI rising to 56.3 in January, up from 56.0 in December.
Forecast for week ahead
Technically the GBP/USD is set to retreat to lower level with the US labor market report rocking the currency pair on Friday to the downside. From the long-term perspective the GBP/USD is supported by the psychological level of $1.4000 and more importantly by the technical Fibonacci retracement line at $1.3830. Only the break of the $1.3830 is seen reverting the trend lower.
The FXStreet Forecast Poll also sees the GBP/USD trading lower in 1-month and 3-month period with weekly central Forecast Poll at $1.4185, while spot rate traded at $1.4135 at the time of an hour and a half after the US January employment report. Participants of the FXStreet Forecast Poll are overly Sterling negative looking at the 1-month and 3-month horizon with $1.4079 seen in 1-month time and $1.3770 forecast for 3-month period from now.
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