GBP/USD Weekly Forecast: Pound Sterling sellers look to retain control

• The Pound Sterling hit monthly lows near 1.2700 against the US Dollar.
• GBP/USD sellers set to retain control in the data-light week ahead.
• Defending the 200-day SMA at 1.2650 is critical for Pound Sterling amid a bearish RSI.

Recording a third consecutive weekly decline, the Pound Sterling (GBP) reached its lowest level in a month against the US Dollar (USD), leaving GBP/USD to battle the 1.2700 threshold.

Risk-aversion offset cautious BoE

GBP/USD remained at the losing end, despite the persistent divergent monetary policy outlooks between the US Federal Reserve (Fed) and the Bank of England (BoE), as the pair witnessed more of a risk trade rather than a rate trade.

Traders remained unnerved at the beginning of the week, anticipating a bunch of top-tier US economic data and central banks’ policy decisions later in the week. Their anxiety was heightened by the fresh escalation of the Middle East geopolitical tensions, between Israel and Iran.

Hamas reported on Tuesday the assassination of its political leader Ismail Haniyeh in an overnight strike in the Iranian capital Tehran. The Iran-backed militant group accused Israel of targeting Haniyeh. Subsequently, the New York Times reported that Iranian Supreme Leader Ali Khamenei had ordered a direct strike on Israel for the killing of Hamas chief Haniyeh. Meanwhile, Israel confirmed on Thursday the killing of Hamas military chief Mohammed Deif after days of suspense.

A heavy sell-off in global stocks, amid renewed US economic concerns, also played its part in fuelling a flight to safety mode, which helped revive the US Dollar (USD) demand as a safe haven. Meanwhile, traders washed their hands off risky assets such as the Pound Sterling.

The US ISM Manufacturing PMI showed further contraction and raised worries over the health of the economy. US ISM Manufacturing PMI declined from 48.5 to 46.8 in July, falling below the expected 48.8. New orders dropped from 49.3 to 47.4. Downbeat US data ramped up bets for a 50 bps September Fed rate cut to 31%, compared to 12% seen a day before. 

Speaking of central banks, both the Fed and the BoE announced their interest-rate decisions during the week. The US central bank kept the fed funds rate at 5.25% to 5.5% but tweaked its policy statement to say that it is "attentive to the risks to both sides of its dual mandate", rather than previously only noting its attention to inflation risks.

During the press conference, Fed Chairman Jerome Powell said that “the broad sense of the committee is that the economy is moving closer to the point at which it would be appropriate to reduce our policy rate,” confirming a September rate cut. 

On the other side, the BoE cut the key policy rate by 25 bps to 5.0%, with policymakers voting 5-4 in favor of the reduction. However, BoE Governor Andrew Bailey said the BoE's Monetary Policy Committee (MPC) would move cautiously going forward. "We need to make sure inflation stays low, and be careful not to cut interest rates too quickly or by too much," he said at the post-policy meeting press conference.

This divergence in the policy outlooks between the Fed and the BoE failed to offer any boost to the Pound Sterling, as risk aversion remained the underlying dominant theme heading into the US Nonfarm Payrolls (NFP) showdown on Friday.

The US Bureau of Labor Statistics (BLS) reported that NFP rose by 144,000 in July. This reading missed the market expectation of 175,000 by a wide margin. Additionally, the BLS announced that it revised the June increase of 206,000 lower to 179,000. Other details of the jobs report showed that the Unemployment Rate edged higher to 4.3% from 4.1% in June, while the Average Hourly Earnings increased by 3.6% on a yearly basis, compared to analysts’ estimate of 3.7%. The USD came under heavy selling pressure with the immediate reaction and allowed GBP/USD to erase a large portion of its weekly losses.

Week ahead: US ISM Services PMI and Fedspeak in focus

It’s a relatively quiet economic calendar in the week ahead, as Pound Sterling traders take a breather after two consecutive action-packed weeks.

There are no top-tier data releases from the UK, and therefore, the focus is expected to be solely on the US macro news and Fedspeak, as Fed policymakers return to the rostrum following the ‘blackout period’.

The US ISM Services PMI will stand out on Monday, as the final S&P Global Services PMI reports will be also published that day from the UK and the US.

There is nothing much of note on Tuesday and Wednesday but the BoE’s Quarterly Bulletin and the US Jobless Claims data will entertain traders on Thursday.

Friday will feature the Chinese inflation data, which could have a strong bearing on risk sentiment, impacting the value of the higher-yielding British Pound. Besides, the UK and the US docket are data-dry on the final trading day of the week.

GBP/USD: Technical Outlook

Following the downside break of the rising trendline support, then at 1.2835, the bearish potential for GBP/USD remains intact and could extend in the upcoming week.

The 14-day Relative Strength Index (RSI) stays below the 50 level, currently near 47.00, suggesting that the downside has more scope, while lacking bearish momentum.

That said, the immediate support for the Pound Sterling aligns at the 100-day Simple Moving Average (SMA) at 1.2683. If sellers crack that level, a test of the 200-day SMA at 1.2650 will be inevitable.

A daily closing below the critical 200-day SMA will likely trigger a fresh downtrend, with the next relevant support levels at the June low of 1.2613 and the mid-May low at around 1.2510.

On the flip side, any recovery in the pair is seen sustaining only if it manages to stabilize above the 1.2790-1.2800 supply zone, where the 50-day SMA and previous static resistance converge.

Further up, the rising trendline support-turned-resistance, now at 1.2850, could challenge the bearish commitments.

If the recovery momentum gathers traction, Pound Sterling buyers must recapture the confluence of the 21-day SMA and the March 8 high near 1.2890.