GBP/USD Weekly Forecast: Buy the dip in US Nonfarm Payrolls week?

• GBP/USD recorded a second weekly loss as the US Dollar stood tall on a hawkish Fed outlook.
• Nonfarm Payrolls from the United States will stand out in a light week for UK economic data.
• GBP/USD could see bargain buyers at lower levels, limiting the downside.

Pound Sterling extended its correction from 14-month highs against the United States Dollar (USD) into a second week as the USD continued to find support from hawkish US Federal Reserve (Fed) expectations. In the week ahead, the focus will shift toward the high-impact Nonfarm Payrolls (NFP) release alongside a slew of significant economic data from the United States.

GBP/USD: What happened last week?

Hawkish Federal Reserve outlook and strong economic data from the United States provided additional legs to the ongoing recovery in the US Dollar. In response, the GBP/USD pair succumbed below the 1.2600 threshold for the first time since mid-June.

Markets shrugged off geopolitical tensions in Russia after a dramatic weekend. The armed rebellion led by Yevgeny Prigozhin, leader of the Wagner group of mercenary fighters, attempted insurrection in Russia, threatening Vladimir Putin’s two-decade-long grip on power. Tensions eased after the armed rebellion was abruptly called off on Sunday. 

At the start of the week, attention shifted toward the European Central Bank (ECB) annual forum on Central Banking in Sintra, where major global central banks heavyweights spoke in a policy panel. Nervousness ahead of the ECB event led to position adjustment in the US Dollar longs, which sent GBP/USD briefly above the 1.2750 level.

However, the US Dollar staged a solid rebound after upbeat US Durable Goods and housing data revived expectations that the Fed would maintain interest rates higher for longer. US Durable Goods Orders rose 1.7% MoM in May, the third such increase in a row, while Core orders, excluding transportation, rose 0.6%, beating estimates of a drop of 0.1% and improving from April's 0.6% decline. Further, sales of newly-constructed homes were up 12.2% in May compared with April and up 20% compared with the same month a year ago, a joint report from the US Department of Housing and Urban Development and the US Census Bureau showed on Tuesday.

The icing on the cake was Fed Chair Jerome Powell’s comments in Sintra as well as in Madrid on Wednesday and Thursday, respectively, which strengthened expectations of more tightening this year. Speaking at the 2023 ECB Forum on Central Banking on Wednesday, major central banks’ bosses, including Fed Chair Jerome Powell, European Central Bank (ECB) President Christine Lagarde, Bank of England (BoE) Governor Andrew Bailey and Bank of Japan (BoJ) Governor Kazuo Ueda, collectively reaffirmed their resolve of fighting inflation by keeping up with interest-rates rises.

“A strong majority of Fed policymakers expect two or more rate hikes by year-end,” Powell said at the Fourth Conference on Financial Stability hosted by the Bank of Spain on Thursday. 

The US Dollar turnaround gathered steam in the second half of the week, accentuated by signs of resilience in the US economy. The Greenback tracked the rally in the US Treasury bond yields after the US economy expanded at a 2% annualized rate in the first quarter of 2023, much stronger than the 1.3% rate previously estimated. Another report showed that fewer than expected workers applied for unemployment benefits last week, signaling a remarkably solid US labor market.

On the final day of the week, the US Dollar lost its recovery momentum against the Pound Sterling. GBP/USD reversed early losses despite the mixed UK Gross Domestic Product (GDP) revision and Current Account data. The UK economy grew 0.1% on the quarter in the first three months of 2023, the same rate as in Q4 2022, the final revision confirmed on Friday. The market had expected an expansion of 0.1% in the first quarter. Meanwhile, the UK Q1 Current Account deficit arrived at £10.757 billion, compared with an expected £8.5 billion deficit and the fourth quarter’s £2.483 billion deficit.

The pair rebounded firmly toward 1.2700 after the US Dollar came under renewed selling pressure after the release of the US PCE inflation data. Inflation in the United States, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, fell to 3.8% on an annual basis in May from 4.3% in April, the US Bureau of Economic Analysis reported on Friday. The market consensus expected a reading of 4.6%. The annual Core PCE Price Index, the Federal Reserve's preferred gauge of inflation, edged lower to 4.6% from 4.7% in the reported period. 

The end-of-the-quarter unwinding in the US Dollar positions also helped the GBP/USD pair to recover some ground. 

US Nonfarm Payrolls play the lead role next week 

Pound Sterling traders gear up for another data-light economic calendar from the United Kingdom in the upcoming week. All eyes will be on the United States statistics heading into Friday’s critical Nonfarm Payrolls release.

Monday will feature the final Manufacturing PMI reports from both sides of the Atlantic but the US ISM Manufacturing PMI and its sub-components will hold significance. China will also report the Caixin Manufacturing PMI, which could affect risk sentiment and higher-yielding currencies such as the British Pound.

Tuesday will be rather quiet as US markets will be closed on account of Independence Day, diverting GBP/USD’s attention toward Wednesday’s US Factory Orders and Minutes of the Fed’s June meeting. The final Services PMI from the UK will also be released, but it is unlikely to have any market impact.

A fresh batch of US economic data will be published on Thursday, including the ADP Employment Change, weekly Jobless Claims, JOLTS Job Openings and the ISM Services PMI. The data flow is likely to throw fresh light on the US economic performance, which could drive the sentiment around the US Dollar.

On Friday, the main focus will be on the US labor market report, with the headline NFP and wage inflation data likely to be closely examined for the Fed’s future policy path.

Apart from the macro data, speeches from the Fed and BoE policymakers will also keep Cable traders busy throughout the week. 

GBP/USD: Technical outlook

GBP/USD has recaptured the upward-sloping critical 21-Daily Moving Average (DMA) at 1.2641 after yielding a daily close below the latter on Thursday.

A weekly close above the latter would call for a bearish reversal, fuelling a recovery toward the initial upside hurdle at the weekly high near 1.2750. The next critical resistance for the pair is seen at the 1.2850 neighborhood, from where the rates have pulled back twice in the last fortnight.

Pound Sterling bulls will then target the 1.2900 round figure on a sustained move higher.

The 14-day Relative Strength Index (RSI) has edged higher above the midline, suggesting that the rebound in the GBP/USD pair could have some legs.

However, if Pound Sterling bulls give into the bearish pressures, then GBP/USD could find immediate support at the 21 DMA at 1.2641. A firm break below the latter will call for a test of the ascending 50 DMA at 1.2548.

The June 12 low of 1.2483 will be next on sellers’ radars, below which strong support is seen at the confluence of the early June lows and the bullish 100 DMA at around 1.2390.

GBP/USD: Forecast poll

A large number of experts polled by FXStreet expect GBP/USD to stretch lower next week. The one-month outlook paints a similar picture with the average target aligning at around 1.2630.