GBP/USD Weekly Forecast: Bank of England rate hike prospects obscured by sluggish inflation and Brexit darkness

• The UK economy released the set of the most important macroeconomic indicators last week sending a mixed signal two weeks ahead of the Bank of England Inflation Report. 
• Sterling fell to 2018 lows past 1.3000 level as decelerating core inflation a slumping retail sales dimmed prospect of the Bank rate hike.
• The GBP/USD faces major psychological support at around 1.3100 with a break below targeting 1.2670 Fibonacci support.
• The FXStreet Forecast Poll turned overly bearish for the upcoming week estimating GBP/USD to fall to 1.2941.

With headline inflation stagnating at 2.4% over the year in June and the UK retail sales slumping regardless of higher consumption related to the progress of the Eglish national team in the Football World Cup, the prospects for the Bank of England to hike the Bank rate at the beginning of August became less clear and weighed on Sterling.

This coupled with UK wages rising 2.7% over the year excluding bonuses, the unemployment rate at 4.2% at the lowest level since 1975 and the political jitters with the UK Prime Minister Theresa May having to use the early elections threat to convince the rebelling Conservative party members of the parliament to pass the trade bill amendments.

The GBP/USD fell from 1.3220 opening level in the third week of July as low as 1.2955 on Thursday before consolidating at around 1.3090 on Friday after the US President Trump verbally intervened against the strong US Dollar commenting negatively the Federal Reserve’s rate hikes.

“China, the European Union, and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge,” Trump wrote on his Twitter in what came as a mercy for Sterling as it send the US Dollar lower across the board on Friday.

UK inflation development

Over the weekend the UK Chancellor Philip Hammond will travel to Buenos Aires for the latest round of Group of 20 finance minister meetings with the sideline agenda of meeting with Bruno Le Maire, the French finance minister to explain the details of the UK Brexit plans as the UK diplomacy target France as its ally to convince the rest of the European leaders about the feasibility of the UK’s Brexit plans.

The UK government under the leadership of Prime Minister Theresa May was facing a major overhaul two weeks ago after the Brexit minister David Davis and later the Foreign secretary Boris Johnson stepped down before the Brexit whitepaper gained support.  The EU at the same time keeps the pressure on the UK with chief Brexit negotiator Michel Barnier saying the EU and Britain must finalize withdrawal agreement, adding that they are not there yet. 

Sterling is under selling pressure on mounting Brexit uncertainty regarding the unclear position of Theresa May in Brexit negotiation with the EU and fundamentally with prospects of the Bank of England hiking rates in August being increasingly unclear. 

Technically the GBP/USD fell below 1.3100 representing a 38.2% Fibonacci support line of the post-Brexit slump from 1.5020 to 1.1940 and it is heading lower on the daily chart. With the fourth week of July being mired by weak economic calendar in the UK and almost no fundamental headlines to support it, the political development and Brexit-related news are set to play the dominant role in the upcoming week.

UK fundamentals cloud the Bank of England rate hike in August

The trinity of the most important UK economic indicators came out mixed during the third week of July with the UK labor market confirming its strength while inflation stagnated and retail sales slumped in June.

The UK labor market report in June came out in line with the market expectations, especially with wages rising 2.5% over the year including bonuses while decelerating to 2.7% over the year in three months ending in May. At the same time, the number of unemployment benefit seekers in June increased by 7.8K  after the revised drop of 3.0K in May, but the unemployment rate remained stagnant at four decades low of 4.2%. The employment rate representing the proportion of people aged from 16 to 64 years who were in work rose to  75.7% in June, the highest since comparable records began in 1971.

More importantly, the UK inflation measured by the Consumer Price Index (CPI) rose 2.4% over the year in June, missing the market estimate of 2.6% y/y increase while core inflation stripping the consumer basket off food and energy prices decelerated to 1.9% y/y in June.

To complement the deteriorating image of the UK economy, the UK retail sales that were expected to deliver a solid increase in June with the proceeding English national team in the Football World Cup in Russia lifting the mood and promoted beer and BBQ, completely missed the estimates.

Total UK retail sales falling -0.5% over the month in June while core retail sales excluding the motor fuel sales fell -0.6% m/m in June. Over the year total retail sales increased 2.9% y/y in June, down from 4.1% in May and core retail sales decelerated to 4.0% y/y in June from 4.6% y/y in May.

Lower retail sales in combination with the UK inflation decelerating above expectations add the uncertainty about the Bank of England’s willingness to hike the Bank rate on August 2, when it is scheduled to release its August Inflation Report accompanied with the press conference with Governor Mark Carney.

Regardless of the actual data, there is still about 75% probability of the Bank of England hiking the Bank rate in August, as the first-quarter economic slowdown is considered by the policymakers only a temporary weather-related blip.

Related stories

• The UK wage growth sets Bank of England for August rate hike
• UK inflation stagnates in a miss to rate hike expectations
• Slumping retail sales put Bank of England’s August rate hike at odds

Technical analysis

GBP/USD daily chart

The daily chart saw GBP/USD falling past 1.31000 and later during the week also falling past 1.3000 psychological level. While breaking 1.3100 was a factor of Brexit uncertainty and politics, slide lower and break of 1.3000 was related to slowing UK inflation and retail sales that dimmed the prospects of the Bank of England raising rates in August.  Technical oscillators like Momentum and the  Relative Strength Index are neutral on the daily chart.  The GDP/USD was unable to close substantially below 1.3000 on Friday and with Trump's intervention against strong US Dollar retreated towards 1.3100. Breaking 1.3100 level representing 38.2% Fibonacci retracement level of the post-Brexit fall from 1.5020 to 1.1940 opens a near-term target of 1.3000 and then 1.2670, representing 26.3% Fibonacci retracement of a post-Brexit slump.

GBP/USD 1-hour chart

With the spot rate leaping up to 1.3100 from 1.2955 last week’s low, the technical picture on GBP/USD on the 1-hour chart is turning bullish. The currency pair still trades within the downward sloping channel, but the Friday’s correction saw the technical oscillators already turned higher with Slow Stochastics rising up towards the overbought territory and both Momentum and the Relative Strength Index rising higher. While stuck within the downward sloping trend, the next hurdle for the trend up is 1.3150before testing the round big figure of 1.3200 as next hurdle. On the downside key resistance is also 1.3000.  

Economic fundamentals in the week ahead

The UK macro calendar for the fourth week of July includes only the minor indicators from the Confederation of British Industries and the house price indices. The speech of the Bank of England Deputy Governor Ben Broadbent is unlikely to change the picture of uncertain path for the monetary policy at it August 2 Monetary Policy Committee meeting while releasing August Inflation Report.

UK economic calendar for July 23-27

On the other side of the Atlantic, next Friday's preliminary estimate for the first-quarter US GDP headlines the week with the market estimating the economic growth rate to double the first quarter's reading of 2.0% with 4.0% annualized growth rate for the second quarter of 2018. 

Apart from the GDP reading on Friday, some manufacturing and services activity data are scheduled for the fourth week of July, including weekly US jobless claims that fell to the lowest level since December 1969 in the week ending July 14.

US economic calendar for July 20-27

Forecast for the next week

The FXStreet Forecast Poll for the week ahead turned bearish for Sterling estimating the exchange rate of GBP/USD at 1.2941, down from 1.3105 spot rate at the time of finishing this report of Friday afternoon in Barcelona.

While bullish versus bearish predictions distributed 18% of bullish versus 68% of bearish predictions among forecasters participating at the FXStreet Forecast Poll last week, the current forecast for the fourth week of July expects spot rate to fall to 1.2941 with 28% of bullish versus 64% of bearish predictions for the week ahead.  

The FXStreet forecasters turned bearish on Sterling two weeks ago in short-term forecasts compared to an overly bullish forecast three weeks ago with 69% of forecasters expecting the bullish trend. 

As long as longer-term forecasts are concerned, the FXStreet Forecast Poll turned also bearish expecting GBP/USD to reach 1.3031 in one month time from now compared to 1.3218 last week and compared to 1.3258 two weeks ago. The same bearish predictions are seen in three months time from now, with FXStreet Forecast Poll forecasting GBP/USD at 1.3118 in three months time from now compared to 1.3245 last week and 1.3249 predicted two weeks ago. 

FXStreet Forecast Poll

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