Dollar strength to weigh on GBP/USD in the near term

Macroeconomic snapshot

The United Kingdom is facing a challenging macroeconomic situation that is causing high inflation and low growth which will pressure the pound lower but the outlook for improvement and the higher interest rates may add some upward support to the Pound’s value.

June meeting of the Bank of England’s, monetary policy committee (MPC)

• The Bank Rate was hiked by 0.50% in June to 5.00%, higher than the 0.25% hike in May.

• The next meeting is on Thursday the 3rd of August.

• The hiking cycle has risen higher and faster than anticipated and is expected to rise further with the 1Y Gilt Yield heading towards 5.5% which is an indication of future hikes. These higher yields could attract foreign investors which is expected to apply upward support on the pound's value.

GDP growth rate for Q1 2023, preliminary estimate

• GDP in the UK for Q1 remained steady at a 0.1% quarterly expansion since Q4 2022.

• The final Q1 report is due on Friday the 30th of June.

• The economy has grown as anticipated but is expected to grow a bit faster. This is likely to lead to increased stock market prices and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply upward support on the pound’s value.

CPI report for May

• CPI in the UK for May remained at 8.7% annual inflation from 8.7% in April.

• The June report is due on Wednesday the 19th of July.

• CPI has not fallen as anticipated although is expected to over the longer term. This is likely to cause higher interest rates and a shift in investor preference towards safer assets, such as government bonds. This is expected to apply upward support on the pound’s value.

Labour report for April

• Unemployment in the UK for April fell slightly to 3.8% from 3.9% in March.

• The May report is due on Tuesday the 11th of July.

• The labour market has improved better than anticipated but is expected to slightly deteriorate. This is likely to lead to slightly reduced growth and a shift in investor preference towards safer assets, such as government bonds. This is expected to apply indifferent support/pressure on the pound’s value.

Russian invasion of Ukraine

• The war is having a detrimental effect on the global and UK economy by causing higher energy prices, supply chain disruptions, financial market volatility, refugee crisis and geopolitical uncertainty. This is expected to apply downward pressure on the pound’s value.

Brexit

• The UK's decision to leave the European Union (EU) has created a great deal of uncertainty about the future of the UK economy. This uncertainty has made investors less willing to take risks, which has led to a sell-off in risky assets, such as stocks and currencies. The resultant effects are expected to limit upward support on the pound’s value.

Cost of living crisis

• The UK cost of living crisis is having a negative effect on the value of the pound. This is because investors are becoming less confident in the UK economy and are therefore less willing to invest in British assets. This is expected to apply downward pressure on the pound’s value.

GBP/USD (four weeks)

The GBP/USD has risen in the past four weeks, supported by central bank disparity. The Fed's hiking cycle is ending, weakening the dollar, while high inflation in the UK has warranted a more aggressive BoE. However, dollar strength has recently returned as traders begin to price in a Fed hike in July.

GBP/USD longer term (four months)

The GBP/USD has been in an uptrend since the start of March when investors priced in a lower Fed Fund peak due to the banking crisis. This move was retraced in May as safe-haven flows strengthened the dollar when the US ran the risk of default due to the debt ceiling not being extended. This crisis was resolved at the end of May and the pair continued its climb to a new peak although this is now retracing as investors are again, looking to price in a higher Fed Fund peak. A move below the 50% fib near 1.23 would form a downtrend.

GBP/USD outlook

The events to keep an eye on:

• Tuesday the 27th of June.

US CB Consumer Confidence Big beat at 109.7 vs 103.9 exp. and prev. 102.5.

• Wednesday the 28th of June.

BoE Governor Bailey speaks ECB Forum on Central Banking, in Sintra.

Fed Chair Powell speaks ECB Forum on Central Banking, in Sintra.

• Thursday the 29th of June.

Fed Chair Powell speaks Fourth Conference on Financial Stability hosted by the Bank of Spain.

US GDP Q1 final Slight upward revision to 1.4% exp. from prev. 1.3%.

• Monday the 3rd of July.

ISM Manufacturing PMI.

• Wednesday the 5th of July.

FOMC Minutes.

• Thursday the 6th of July.

US ADP Non-Farm Employment Change prev. 278K.

ISM Service PMI.

JOLTS Job openings.

• Friday the 7th of July.

US Average Hourly Earnings m/m.

US Non-Farm Employment Change.

US Unemployment Rate.

CME group 30-day Fed fund futures

• July: steady sentiment of a 0.25% hike, 75% in favour (prev. 75%).

• September: holding sentiment of a hold, 70% in favour (20% for a 0.25% cut - prev. 15%).

Six month bond yields

• Gilt: down to 5.6% from 5.8% last week.

• Treasuries: holding at 5.4% from 5.4% last week.

Value of the GBP/USD to remain above 1.25 unless UK inflation outlook significantly improves: The four week moves have been rising from 1.25 to 1.28. Events this week are favoured towards a stronger dollar as CB Consumer confidence was a big beat, Powell is likely to remain hawkish and the GDP is looking to be upwardly revised on Friday. There is also a risk for a weaker Pound as the bond yields are falling which suggests the peak UK Bank Rate is going to be lower than anticipated.

Longer Term Value of the GBP/USD to remain above 1.18, downtrend formed on moves below 1.23: The four month moves have been climbing from 1.18 to 1.28 although is retracing to test 1.26. The macroeconomic situation suggests the downtrend is unlikely to extend which would indicate moves beyond 1.28 are eventually possible to extend the uptrend.