GBP/USD Weekly Forecast: Bulls yield in to the UK political turmoil

• GBP/USD defended weekly gains amid UK political debacle.
• Surging yields lifted dollar bulls on aggressive Fed rate hike outlook.
• Focus shifts to top-tier US/UK data, as British political chaos extends.

GBP/USD witnessed a roughly 300 pip move in yet another dramatic week for UK politics. British Prime Minister Liz Truss’ resignation did offer some calm to GBP buyers, but surging US Treasury yields checked the pair’s upside. BoE-Fed policy divergence also came to the fore, as markets brace for an eventful week ahead. UK political developments and Fed rate hike expectations will continue leading the way.

What happened last week? 

Cable set off the week with a blast, reversing Friday’s downturn as bulls capitalized on the new UK Finance Minister Jeremy Hunt’s new fiscal plan. The pair hit the highest level in eight days at 1.1439 after Hunt reversed "almost all" of the tax cuts announced in his predecessor's mini-budget and scaled back support for energy bills. Risk flows returned at the start of the week on expectations of the new fiscal framework in the UK and smashed the US dollar across its major rivals. The UK gilt yields tumbled, offering relief to the financial markets.

A cautious mood seeped back into the market towards the middle of the week after Beijing reported the highest COVID cases in four months. Further, global yields surged on growing recession fears and aggressive tightening expectations to curb raging inflation. The UK inflation hit double-digit growth yet again at 10.1% YoY in September, reaching the highest since 1982, while euro area inflation also stayed at a record high, raising concerns that steeper rate hikes by global central banks could result in an imminent recession. Meanwhile, Tory rebels continued with their plot to topple the Truss government, with up to 100 letters of no-confidence sent to Graham Brady, Chair of the powerful backbench 1922 Committee, calling on her to go. Cable then extended its tumble for two straight days on Wednesday, testing bullish commitments below 1.1200.

The renewed US dollar recovery, propelled by firmer Treasury yields and hawkish Fed commentary, exerted additional downside pressure on cable in the second half of the week. The benchmark 10-year US rates climbed above the key 4.25% level, its highest since 2008 while the 2-year yields hit 15-year highs. Markets are pricing that the Fed won’t pause its rate-hike track until a 5% terminal rate is reached or even beyond, as inflation continues to remain red-hot. The US dollar index, therefore, reclaimed the 113.00 hurdle, resuming its bullish momentum.

GBP bulls were offered a temporary reprieve by the UK PM Truss’ resignation on Thursday. Truss quit after a tumultuous and historic brief term in which her economic policies roiled financial markets. But uncertainty around the UK political scenario, quickly resurfaced and took the wind out of the GBP/USD recovery, as Truss’s resignation leaves a divided party seeking a leader who can unify its warring factions.

Towards the end of the week, GBP sellers remained in control, as dollar bulls refused to give in amid the relentless rise in the US rates across the time horizon. The widening Fed and BoE monetary policy divergence also plays its part, especially after Thursday’s comments from the UK central bank Deputy Governor Ben Broadbent. Broadbent cast doubts on current market pricing, prompting a further reduction in expectations for the terminal rate by around 15 bps since the close on Wednesday. He said that "whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen.”

Amid a data-dry US docket, the disappointing UK Retail Sales kept cable bulls at bay. The UK retail sales decreased 1.4% over the month in September vs. -0.5% expected and -1.7% previous. The core retail sales, stripping the auto motor fuel sales, declined 1.5% MoM vs. -0.3% expected and -1.6% seen in August. Weak UK consumer spending, amid surging inflation and political chaos, is likely to put the central bank in a tough spot.         

A big week ahead

It’s a ‘blackout period’ for the Fed policymakers, which will bring the economic releases to the forefront. Traders brace for significant top-tier macro news from both sides of the Atlantic in the week ahead. British political developments will also be closely followed, as a new Prime Minister is selected.

Monday sees a fiery start to an eventful week, with the release of the UK and US S&P Global Preliminary Manufacturing and Services PMIs. US Treasury Secretary Janet Yellen is also due to speak in New York later in the day. On the UK political front, nominations will close at 14:00 GMT on Monday and candidates are expected to have the backing of at least 100 MPs to run. So far, no MPs have publicly confirmed they are running, but names rumored to be in the running include former chancellor Rishi Sunak and the leader of the House of Commons, Penny Mordaunt.

The UK CBI Industrial Orders Expectations data will be published on Tuesday. BOE Chief Economist Huw Pill is scheduled to speak at an event hosted by the Office for National Statistics, in London. In the US, the Conference Board (CB) Consumer Confidence data will drop in amongst other minority reports.

China’s Q3 GDP, activity and trade data will be reported on Wednesday – after a week’s delay. The data could have a significant impact on investors’ risk appetite and eventually on the higher-yielding pound.

On Thursday, the US advance Q3 GDP will be critical data to watch for fresh hints on the Fed rate hike outlook. The US Durable Goods data will also be published alongside the growth numbers. The European Central Bank (ECB) will announce its rate hike decision on Thursday, which could have a EUR/GBP cross-driven rub-off effect on cable.

There is nothing much of relevance, in terms of economic data, from the UK on Friday. Therefore, all eyes will be on the US Core PCE Price Index, Personal Spending and Revised UoM Consumer Sentiment data. Also, the new UK Prime Minister will be announced on the final trading day of the week.

GBP/USD: Technical outlook

GBP/USD hit the lowest level in six days at 1.1059, having tested offers below the critical short-term 21-Daily Moving Average (DMA) at 1.1128. The downisde break from the rising trendline support, earlier this week at 1.1205, recalled sellers. Buyers then surrendered several critical support areas, including the 21DMA amid intense downward pressure. Weekly closing below the 21DMA will revive the broader downtrend in the GBP/USD pair, calling a fresh decline towards the October 12 low at 1.0923. The next significant cushion is envisioned at the September 29 low of 1.0762. The 14-day Relative Strength Index (RSI) is inching lower below the midline, suggesting that the renewed downtrend could have just begun.

On the flip side, any rebound in the major will need to convince buyers above the previous 21DMA support now resistance. The next recovery target is seen at the trendline support-turned-resistance, now at 1.1253. Further up, the October 20 high at 1.1330 will be on bulls’ radars, opening doors for a fresh upswing towards the bearish 50DMA at 1.1425. Acceptance above the latter will negate the near-term bearish outlook. 

 

GBP/USD sentiment poll

The FXStreet Forecast Poll hints at more pain for the British Pound. The GBP/USD pair is seen consolidating in the near term, neutral in the weekly perspective, but plummeting below the 1.1000 level in the following weeks. Bears outpace bulls in the monthly and quarterly views, with the pair seen on average at 1.0905 and 1.0857, respectively. On the other hand, bulls are 20% in the near term, but below such a level in the longer-term perspectives.

As for the Overview chart, the weekly moving average is flat, as most targets accumulate in a tight range around the current level. The spread widens in the monthly view, with the moving average heading marginally lower. It is worth noting some market players are aiming at targets below 1.0500. The bearish case is stronger in the quarterly view as the pair is seen nearing parity, with the number of experts betting for lower lows below 1.1000 increasing sharply from the previous time frame under study.