GBP/USD Forecast: Pound Sterling looks north after UK election

The Pound Sterling extended the previous week’s rebound against the US Dollar.
GBP/USD looks forward to the US CPI inflation data for the next push higher.
The 1.2900 level and the bullish daily RSI could continue to lure Pound Sterling buyers.

The Pound Sterling (GBP) built on the previous week’s rebound against the US Dollar (USD), driving the GBP/USD pair back toward 1.2800, the highest level in nearly three weeks.

Pound Sterling capitalizes on US Dollar pullback

GBP/USD staged a solid comeback from a six-week trough to reach multi-week highs, mainly due to a steep correction in the US Dollar across its main currency rivals.

Dovish remarks from Federal Reserve (Fed) Chairman Jerome Powell, during his speech at the European Central Bank (ECB) Forum on Central Banking in Sintra, spelled doom for the Greenback. The pain was exacerbated by a bunch of disappointing US business activity and employment data.

Fed Chair Jerome Powell acknowledged progress in disinflation on Tuesday. The ADP data from Wednesday showed that the US private sector employment rose by 150,000 in June, following the 157,000 increase (revised from 152,000) recorded in May.

Meanwhile, the number of Americans filing first-time unemployment claims rose 4,000 last week to 238,000, according to Labor Department data released on Wednesday. The figure was slightly higher than the estimate of 235,000. Finally, US ISM Services PMI fell into contraction territory in June, arriving at 48.8 vs. May’s 53.8 and the expected 52.5 print.

On Friday, the all-important US labor market report, including the Nonfarm Payrolls (NFP), also failed to lift the mood around the US Dollar. Data published by the Labor Department showed that the headline NFP increased by 206,000 in June, beating the market forecast for a 190,000 gain. Despite strong June figures, April and May readings were significantly revised down by a combined 111,000. Average hourly earnings rose 3.9% year-on-year, as expected, registering its lowest since the second quarter of 2021.

Markets are currently seeing a 74% chance of a cut in September, according to the CME FedWatch tool, and pricing in potentially two rate cuts this year. At the beginning of the week, the September rate cut probability stood at around 64%.

On the UK side of the equation, the Pound Sterling held firmer throughout the week, having already priced in a landslide win for the opposition Labour Party. Finally, early Friday, the results of the vote count showed a sweeping victory for Labour, securing above the required 326 seats needed for a working majority in the 650-seat strong House of Commons.

Outgoing British Prime Minister, Rishi Sunak, conceded defeat in the national election and congratulated the Labour Party leader, Keir Starmer. Prime Minister-elect Keir Starmer in his victory speech said “today we start the next chapter -- begin the work of change, the mission of national renewal and start to rebuild our country.”

The Pound Sterling paid little heed to the exit polls and the outcome of the UK 2024 general elections, as it would take some time for markets to assess the implications of a Labour win for the Bank of England’s (BoE) interest-rate cut outlook and domestic currency performance.

Week ahead: US CPI inflation data in focus

After an action-packed week, the start of the upcoming week appears relatively quiet before the calendar fills up with top-tier data in the latter half.

Monday is devoid of important data releases from both sides of the Atlantic but BoE policymaker Jonathon Haskel’s speech will grab some attention ahead of Tuesday’s BoE Quarterly Bulletin and Fed Chair Powell’s testimony about the Semi-Annual Monetary Policy Report before the Senate Banking Committee in Washington.

Powell’s words once again could trigger a fresh directional move in the US Dollar, significantly impacting the Cable.

Yet another light docket on Wednesday, with BoE Chief Economist Huw Pill taking up the rostrum. It will round 2 of Powell’s testimony, this time before the House Financial Services Committee.

On Thursday, all eyes will be on the US Consumer Price Index (CPI) release for June, which will provide fresh hints on the timing of the Fed’s first rate cut this year. Ahead of that, the UK monthly Gross Domestic Product (GDP) could entertain Pound Sterling traders.

Friday will feature the US Producer Price Index (PPI) report, followed by the preliminary University of Michigan (UoM) Consumer Sentiment and Inflation Expectations data, winding down a mediocre week.

Apart from the economic statistics, traders will continue to analyze the speeches from the Fed policymakers and their implications on the path forward on interest rates.

GBP/USD: Technical Outlook

Pound Sterling bounced off strong support near 1.2610 and took out all the major daily simple moving average (SMA) resistances on its road to recovery against the US Dollar.

The 14-day Relative Strength Index (RSI) recaptured 50, currently near 60, suggesting a shift in risks to the upside.

These bullish technical indicators suggest that the path of least resistance for the GBP/USD pair appears north.

The primary resistance is now aligned at the intermittent highs near 1.2815.

A sustained move above the key 1.2815 upside hurdle could fuel a fresh advance toward the March high of 1.2894. The last line of defense for Pound sellers is seen at the 1.2950 psychological level.

Conversely, a failure to find a foothold above the 1.2800-1.2815 supply zone could reinforce selling interests.

Pound Sterling sellers will then target the 1.2700 level once again, the confluence of the 21-day SMA and the round figure.

The 50-day SMA at 1.2673 and the 100-day SMA at 1.2648 could be the next support levels on sustained declines.

Further down, the abovementioned static support near 1.2610 will come into play once again. If that gives way, then a test of the 200-day SMA at 1.2578 will be inevitable.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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