GBP/USD Forecast: Hundreds of pips at stake on the BOE's close call, Fed, Brexit also eyed

Upbeat data has lowered the chances of a rate cut, a decision that is on a knife's edge. The Bank of England is left, right and center, but the Fed decision and other events may also have a significant impact. 

This week in GBP/USD: Upbeat data, coronavirus fears

After a streak of disappointing figures, the UK jobs report provided a positive surprise with wages holding onto a yearly gain of 3.2% in November. It was followed by an upbeat Industrial Trends statistic from the Confederation of British Industry – a figure that also surprised traders by triggering a rally in sterling. 

The last substantial release came from Markit. Its Purchasing Managers' Indexes both exceeded estimates, further casting doubt about a cut by the BOE. However, the manufacturing figure is still pointing to contraction in the sector.

GBP/USD volatility considerably increased as speculation mounted. US dollar movements also had their share in rocking the currency pair. The greenback was affected by fears of the coronavirus outbreak.

While the World Health Organization (WHO) refrained from declaring a global emergency, Chinese authorities shut down transport links to Wuhan and other cities where the SARS-like virus was most prominent. Fears of damage to the worldwide economy benefited the dollar, but it was not a one-way street. 

The House of Lords gave the final seal of approval the Withdrawal Bill, allowing the UK to leave the EU on January 31 as expected. The focus remains on future EU-UK relations. Prime Minister Boris Johnson reiterated his position about reaching a deal with the bloc by year-end, despite doubts from Brussels. The topic was on the sidelines amid BOE speculation.

UK events: BOE left, right, and center

The central bank's decision dominates the UK economic calendar. The consensus of economists is pointing to the BOE holding rates, but bond markets see it as a coin flip. Apart from the decision, the level of support it receives is critical. The nine-strong Monetary Policy Committee will likely be split in any case. Mark Carney, the outgoing Governor of the BOE, may find himself in the minority in his last rate event before passing the baton to Andrew Bailey. 

The "Old Lady" will also convey a message about future decisions, and that may whipsaw the pound. A "hawkish cut" or a "dovish hold" – signaling the opposite of the decision – cannot be ruled out. 

For all the details, see BOE Preview: Carney to cause carnage with a hawkish cut? Four scenarios for GBP/USD

The UK Brexits on the following day, but retains most of its rights and obligations within the EU until year-end. Headlines about the historic day and perhaps Big Ben's bong will fill the papers, but markets are focused on the outcome of the post-transition agreements. Negotiations are yet to start. 

Here is the list of UK events from the FXStreet calendar:

US events: Fed stands out 

The US dollar will likely be impacted by coronavirus news, with worrying developments benefiting the greenback and hopeful headlines pushing it 

New Home Sales kick off the week, and they are expected to remain at elevated levels in December. Durable Goods Orders, due out on Tuesday, will provide some insights on investment. Have they picked up as the US and China were nearing an accord? The data also feeds into growth figures due out later in the week.

The Federal Reserve's decision on Wednesday is the main event of the week. The Fed is expected to leave rates unchanged and continue signaling an extended pause. In its previous decision in December, the bank cut rates but also said that current levels are "appropriate." Since then, Fed officials have echoed this message while economic figures have been on the softer side, but uncertainty has dropped after the Sino-American trade deal.

While the Fed will try not rocking the boat, markets will be scrutinizing every word in the rate statement and the accompanying press conference by Jerome Powell, Chairman of the Federal Reserve. 

See Fed Preview: Five things that will determine the dollar's direction

The first read of Gross Domestic Product figures for the fourth quarter of 2019 is predicted to show that growth is close to 2,1% annualized seen in the third quarter. The initial release tends to surprise markets and trigger volatility. Improvement in business investment is also of high interest to markets as well as trade figures within the GDP report.

The Fed's preferred gauge of inflation, the Core Personal Consumption Expenditure (Core PCE) will probably remain around 1.6% in the read for December – below the bank's 2% target. It is published alongside other significant statistics such as Personal Consumption and Personal Spending. 

Overall, the Fed and GDP stand out in the last week of January. 

Here the upcoming top US events this week:

GBP/USD Technical Analysis 

Pound/dollar has recaptured the 50-day Simple Moving Average and continues trading above the 100 and 200-day SMAs. However, upside momentum has disappeared. The Relative Strength Index is balanced. 

Overall, bulls are in the lead.

GBP/USD faces a resistance area around 1.3150-13170. Both levels capped it during January. Further up, 1.3210 held it down in early January, and 1.3285 was the Christmas week peak. Next, 1.3420 and 1.3510 await the currency pair.

Support awaits at 1.3085, which worked as support in late January. It is followed by 1.3035, which capped cable in late December and provided support in January. It is followed by 1.2950, a double bottom that was seen in recent months.

It is essential to note that high volatility during the BOE could push the pound through many levels only to see it snap back to the range. 

GBP/USD Sentiment

It is hard to know what Carney and his colleagues are thinking, but cutting rates has marginally higher odds. That could send sterling down, but the move may stall if the bank signals a pause. 

The FX Poll is showing a bullish bias in all timeframes. Are experts pricing out a BOE cut? Targets are barely changed from the previous week's poll and seem more cautious – on average – than recent sterling volatility. 

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