GBP/USD Weekly Forecast: Sterling trapped in ranges after BoE's hawkish twist as GDP's slowdown was downplayed

• Sterling bears made an attempt to break 1.3100 but they were rejected with the Bank of England making an unexpected hawkish turn in June voting 6-3 for the Bank rate unchanged at 0.50%. 
• The Bank of England’s hawkish twist steals the spotlight from next week’s final first-quarter GDP release with policymakers already saying that the slowdown was just a weather-related blip.
• The UK Prime Minister Theresa May survived the crucial vote in the House of Commons that finally overvoted the House of Lords’ grip for final say on Brexit conditions.
• GBP/USD is set to be capped between 1.3100 and 1.3480 representing 50% and 38.2% Fibonacci retracement of the Brexit related slump to from 1.5020 to 1.1940. 

With lack of macroeconomic news and the political development confirming the UK government proposals in the House of Commons, the key risk event for Sterling last week was the Bank of England monetary policy decision due Thursday. Sterling is set to close the third week of June little changed on the upside  against the US Dollar after opening at 1.3275 on Monday. The

The GBP/USD was trading lower and lower during the first half of last week as the political uncertainty weighed on Sterling. The House of Commons voting about the set of Brexit-related laws previously approved by anti-hard Brexit oriented House of Lords was de facto seen as a confidence vote for Conservative party leader of the UK government Theresa May.

With political uncertainty weighing on Sterling, the GBP/USD fell as low as 1.3102 on Thursday morning, before the Bank of England monetary policy decision was due.

While the Bank of England decision to keep the Bank rate unchanged at 0.50% and the asset purchasing program at £435 billion, it was the hawkish twist that pushed Sterling up 200 pips until Friday.

The Bank of England chief economist Andrew Haldane joined a group of the rate dissenters voting together with Ian McCafferty and Michael Saunders for a rate hike making the voting pattern 6-3 instead of 7-2 expected by the market.

The hawkish twist was also underlined by the outlook for the UK economy that is getting increasingly brighter while the Bank of England confirmed that the slowdown from the first quarter this year was just a weather-related blip.

”Number of indicators of household spending and sentiment has bounced back strongly from what appeared to be erratic weakness in Q1, in part related to the adverse weather.  Employment growth has remained solid,” the Bank of England wrote in the monetary policy statement on Thursday. 

Moreover, the outlook for inflation and wages confirms that the external drivers of the UK inflation will be soon replaced by domestic factors. “ Most indicators of pay growth have picked up over the past year and the labor market remains tight, suggesting that domestic cost pressures will continue to firm gradually, as expected” Bank of England further said. 

The Bank of England statement boosted Sterling to reverse the course and to trade around 1.3300 by the end of the third week of June. The Bank of England’s hawkish statement also steals the lights from final first-quarter GDP figures due on Friday, June 29.
 
While there is not much on the economic calendar for next week, the European summit planned for next weekend is of a crucial importance for the UK and for Sterling, as Brexit negotiations agenda always plays a bigger role.

There is one more element that could play a significant role over the course of next week and that is the trade wars story. The trade war story, as long as it rages on and on, tends to underpin the US Dollar, especially against low yielding currencies like GBP and commodity-based currencies like the AUD, the CAD, and the NZD. The reason is pretty obvious; the US Dollar is a carry trade currency and a safe haven at the same time. So as long as US Dollar yields better, then there is no reason for investors to opt for other currencies to “park” their money in.

Related story

The Bank of England chief economist Andy Haldane joins the camp of Hawks in June

Technical analysis

GBP/USD daily chart

The daily chart saw GBP/USD testing key resistance of 1.3100 representing 38.2% retracement of the post-Brexit slump from 1.5020 to 1.1940 and jumping up from that level. Key technical oscillators are pointing in different directions on a daily chart. The Relative Strength Index leaped off the oversold territory and turned higher with GBP/USD correcting off 1.3100 towards 1.3300. The end of the week correction towards 1.3270 sees the Relative Strength Index turning flat. On the other hand, Slow Stochastics made a bullish crossover and it is pointing upwards. The GDP/USD was unable to cross substantially above 1.3300 and with correction continuing it is likely to face 1.3380 and 1.3400 before testing key 1.3480 level representing 50% Fibonacci retracement level of the Brexit-related fall and it is turning lower. The GBP/USD is currently trapped in ranges formed by 38.2% and 50% Fibonacci retracement of the above-mentioned move at 1.3100 and 1.3480. The death star crossover of the 50-day and 100-day moving average on the daily chart indicates further downside potential for GBP/USD first attempting to break 1.3200 before attacking 1.3100 represented by 50% Fibonacci retracement of the post-Brexit slump from 1.5020 to 1.1940. On the upside, the GBP/USD needs to break back above 1.3380 to target 1.3450, high from two weeks ago.

GBP/USD 1-hour chart

With the spot rate falling as low as 1.3100 and correcting back towards 1.3300 level, the technical picture on GBP/USD on the 1-hour chart is also turning bearish, moving within a downward sloping channel. The technical oscillators already turned higher with Slow Stochastics actually making a bearish crossover in the overbought territory that is a selling signal. The break below 1.3200 should open the way for GBP/USD to test 38.2% Fibonacci level of 1.3100 as next hurdle. 

Economic fundamentals in the week ahead

The UK macro calendar is pretty empty for the with starting June 25 and ending June 29. The Bank of England governor Mark Carney is expected to hold a press conference about the Financial Stability Report and Bank Stress Test results, in London on Wednesday, but the press conference is unlikely to disclose any monetary policy views.

On the data front the first-quarter GDP in the UK headlines next week, but with the Bank of England already stressing that the first quarter GDP was just the weather-related blip, the relevance of this data is lower.

UK economic calendar for June 25-29

On the other side of the Atlantic, the final week of June will be headlined by data on durables goods orders, the final reading of the first-quarter GDP and even more importantly the core Personal Consumption Expenditures data providing the view about the underlying inflation development in the US.

Two weeks after the FOMC hiked rates will see the whole plethora of Fed speakers talking on different forums, but the key idea is still fixed. The FOMC raised rates as expected, but failed to provide an extra hawkish message for markets and what we can expect from now on, is just talk, talk and talk.

Otherwise only the second tier indicators are due in the US including the housing market and weekly jobless claims. 

US economic calendar for June 25-29

Forecast for the next week

The FXStreet Forecast Poll for the next week turned all bullish forecasting 1.3290 for GBP/USD in one week time, 1.3355 for GBP/USD in one month time and 1.3404 in three months time from now. 

Participants in the FXStreet Forecast Poll last week anticipated the spot rate to reach 1.3230 this Friday and with the spot rate around 1.3270, the forecast error is very small, only 40 pips away. That is a substantial improvement from two weeks ago when the FXStreet Forecast Poll was forecasting 1.3454 with the spot being at 1.3280 and the forecast error reaching 140 pips. 

For the next week, the FXStreet Forecast Poll has become overly positive with 69% of forecasters expecting the bullish trend in one week time compared to 65% of participants in the FXStreet Forecast Poll turning GBP/USD bearish last week. This actually matches the forecast poll distribution from two weeks ago, when the also 69% of forecasters turned bullish.  A bearish trend for next week is forecast only by the minority of 28% and 11% predict a sideways trend for the week ahead.

As long as longer-term forecasts are concerned, the FXStreet Forecast Poll turned bullish expecting 1.3355 in one month time from now, compared to a bearish forecast of 1.3263 in the one-month horizon last week. In three months time from now, FXStreet Forecast Poll sees GBP/USD at 1.3404, up from 1.3388 in three months time last week and down from 1.3508 forecast for 3-months from now predicted two weeks ago. 

FXStreet Forecast Poll

 

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