GBP/USD Weekly Forecast: Fed-BoE policy divergence could trigger next directional move in Pound Sterling

• The Pound Sterling extended its pullback from yearly highs against the US Dollar.
• GBP/USD still seems like a ‘buy-the-dips’ trade heading into the Fed and BoE policy meetings.
• Pound Sterling buyers stay hopeful, as technicals remain favorable. 

The Pound Sterling (GBP) stretched its corrective downside from yearly highs against the US Dollar (USD), sending GBP/USD back under 1.2900 – the lowest level in over a week.

Pound Sterling succumbed amid heightened risk aversion

GBP/USD maintained its corrective downside mode during the past week, despite a broadly rangebound US Dollar. Divergent monetary policy outlooks between the US Federal Reserve (Fed) and the Bank of England (BoE) also failed to offer the much-needed lift to the Pound Sterling, as the sentiment around the higher-yielding currency was dented by resurfacing concerns over China’s economic slowdown.

Markets turned risk averse after policymakers at China’s Third Plenum failed to roll out any strong policy measures to stimulate the post-pandemic economic recovery. Additionally, surprise interest rate cuts by the People’s Bank of China (PBOC) and several Chinese state-owned banks accentuated mounting worries over China’s economic prospects.

China's central bank, cut the one-year Medium-term Lending Facility (MLF) rate from 2.50% to 2.30% on Thursday. Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (AgBank), China Construction Bank, Bank of China and Bank of Communications cut deposit rates by 5 to 20 basis points (bps), according to statements on their websites.

This combined with an unimpressive start to the earnings reports from the “Magnificent Seven” megacap technology companies kept the market environment dour. Although Google parent Alphabet delivered a beat on both the top and bottom lines, the company’s chief signaled patience will be needed to see concrete results from artificial intelligence investments. Meanwhile, Tesla fell as much as 7% after profit fell short of estimates and the electric-vehicle giant delayed its Robotaxi event to October.

The USD, however, was unable to take advantage of the risk-off sentiment, as it bore the brunt of the relentless USD/JPY sell-off. The Japanese Yen rebounded firmly to three-month highs against the Greenback on carry trades unwinding, courtesy of heightening expectations that the Bank of Japan (BoJ) will hike rates by 10 basis points (bps) next Wednesday. Additionally, markets fully priced in a September Fed rate cut, weighing negatively on the buck.

Nonetheless, the upbeat US Gross Domestic Product (GDP) for the second quarter of 2024, alongside a sharp USD/JPY upswing, did offer some saving grace to USD buyers toward the end of the week. But expectations of a softer US core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure, curbed the US Dollar’s enthusiasm, lifting the GBP/USD pair from near 1.2850 key demand area.

On Thursday, the core PCE deflator rose 2.9% at an annualized rate in Q2, down from 3.7% in the previous quarter, indicating a moderation in inflationary pressure,” analysts at RBC Economics noted. Meanwhile, the US economy expanded at an annualized rate of 2.8% in Q2 2024, doubling from the 1.4% growth reported in the previous quarter. 

The US Bureau of Economic Analysis reported on Friday that inflation in the US, as measured by the change in the PCE Price Index, edged lower to 2.5% on a yearly basis in June from 2.6% in May. The core PCE Price Index, which excludes volatile food and energy prices, rose 2.6% in the same period, matching May's increase. GBP/USD showed little to no reaction to these data ahead of the weekend.

All eyes on Fed, BoE policy decisions and Nonfarm Payrolls

Another action-packed week unfolds for the Pound Sterling, as all the attention remains centered on the policy announcements by the Fed and the BoE on Wednesday and Thursday respectively.

Monday is quiet, in terms of any macro releases from both sides of the Atlantic while Tuesday will feature the BoE Quarterly Bulletin, US CB Consumer Confidence and JOLTS Job Openings survey.

The Fed and BoE interest rate decision and banks’ outlook on rates will set the tone for the Pound Sterling markets in the coming weeks. Markets have fully priced in a September Fed rate cut. On the other hand, interest rate futures are pricing a 51% chance that the BoE will reduce rates by 25 bps next week while projecting 54 bps of cuts for 2024, up from 49 bps of cuts on Wednesday.

The weekly US Jobless Claims and the ISM Manufacturing PMI will be published on Thursday, following the BoE events.

The all-important US Nonfarm Payrolls will hog the limelight on Friday, as Fed policymakers return after a two-week ‘blackout period’. BoE Chief Economist Huw Pill is also due to speak on Friday.

GBP/USD: Technical Outlook

The Pound Sterling correction is seen paving the way for a fresh uptrend, as portrayed by the GBP/USD daily chart.

The 14-day Relative Strength Index (RSI) has stalled its descent and holds above the 50 level, currently near 52.50, suggesting that buyers still remain in the game.

However, a daily candlestick close below the key 21-day Simple Moving Average (SMA) support at 1.2851 will shake off any odds for a recovery.

On a renewed downside, the immediate cushion will be seen at the previous key resistance near 1.2800.

Further south, the 50-day SMA at 1.2777 will be tested, exposing sellers to the 100-day SMA at 1.2682.

Alternatively, recapturing the weekly high of 1.2942 is critical to initiate a fresh uptrend toward the yearly high of 1.3045.

Ahead of that level, the 1.3000 round figure will challenge the bearish commitments.