GBP/USD Weekly Forecast: US Dollar shows no mercy with Sterling as US rate hike looms

 

• The UK CPI rose 2.4% in April compared with 2.5% y/y expected by the market while core inflation rose 2.1% in April compared with 2.2% y/y expected.
• With inflation lower than expected, the Bank of England is in no hurry to normalize its monetary policy and the Bank rate is expected to remain at 0.5% until autumn this year.

The GBP/USD is trading near its cyclical lows of 1.3305 at the end of the fourth week of May after the set of important macro data during the week failed to support it against the US Dollar. 

The macro picture in the UK is framed by two important trends, slowing economic growth and decelerating inflation. The UK inflation is approaching the Bank of England 2% inflation target faster than originally predicted in support of the real, inflation-adjusted wages while the economic growth is almost stagnant in the first quarter of this year. Both measures though support the argument of the Bank of England staying pat on the Bank rate with the market forecasting 0.25% Bank rate hike in February on 2019 based on effective money market rates.

In April, the headline UK inflation decelerated to 2.4% over the year, while the core inflation decelerated to 2.1% y/y, just one-tenth of a percent above the Bank of England inflation target.

The re-pricing of the market expectations based on the development of the macroeconomic indicators in the UK is the main reason why the GBP/USD is falling off the cliff since the middle of April while trading more than 1,000 pips lower compared to its cyclical peak and a 22-month high of 1.4377 from April 17 this year.

“Growth—at 0.1% in the first quarter of this year—was much weaker, and inflation—at 2.5% in March—was notably lower than we had projected in February,” the Bank of England Governor Mark Carney said in the opening remarks at the press conference after publishing May Inflation Report on May 10.

Decelerating inflation is Sterling negative as it buys the Bank of England time before it has to act on interest rates. The Bank Of England Governor and the Monetary Policy Committee (MPC) external member Gertjan Vlieghe both shared their outlook for the monetary policy saying “interest rates in the UK will go up very gradually over the next few years.”

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• With UK inflation decelerating, the chances for the Bank rate hike move to autumn

While in the UK only the manufacturing PMI is scheduled for the next week, the US economic calendar will see the first revision of the first quarter US GDP report and even more importantly the May employment data from both the ADP and the government’s Labor Department that are both likely to add around 190K new jobs in the US economy in support of the June rate hike by the US Federal Reserve Bank.

Technically, the GBP/USD remains oversold with oscillators pointing out to possible reversal, but the fundamental picture clearly favors the US Dollar instead of Sterling.

On a daily chart, the GBP/USD broke below 1.3460-1.3500 strong support zone last week and with the UK inflation decelerating more than expected, it fell to December 2017 low of 1.3305. Should the 1.3300 round big figure be broken to the downside, next target is 1.3200 before targeting 1.3120, representing 31.8% retracement line of the post-Brexit slump from 1.5040 to 1.1940 low.

UK inflation is decelerating more than expected

Technical analysis

GBP/USD daily chart

Technically, the long-term picture on GBP/USD is unchanged with the Slow Stochastic indicator being deeply in oversold territory since April 25 this year and the Relative Strength Index creeping alongside the oversold territory for last 20 trading days. The Momentum corrected slightly higher, but with GBP/USD falling lower by the end of the fourth week of May it has also turned lower. The GBP/USD broke below 1.3460-1.3500 strong support zone last week and with the UK inflation decelerating more than expected, it fell to December 2017 low of 1.3305. Should the 1.3300 round big figure be broken to the downside, next target is 1.3200 before targeting 1.3120, representing 31.8% retracement line of the post-Brexit slump from 1.5040 to 1.1940 low.

GBP/USD 1-hour chart

The short-term picture is also GBP/USD negative with the technical oscillators taking a breather with the spot rate correcting higher towards 1.3400 during the last week and now are closer to the neutral zone, but all point lower. Technically, the GBP/USD is facing the psychological support at around 1.3300 before targeting 1.3240 representing a 50% Fibonacci retracement of the upmove from 1.2000 to 1.4377. Short term target of 1.3240 remains intact for GBP/USD for the next week.

Data next week

The economic data published during the fourth week of May came out mixed for Sterling with inflation decelerating more than expected, but the Uk retail sales rising above expectations and the UK first quarter GDP coming in unchanged from preliminary reading and matching the market expectations.

The UK headline inflation decelerated to 2.4% over the year in April, down from 2.5% expected by the market while core inflation stripping the consumer basket off the food and energy prices decelerated to 2.1% y/y. The news of inflation approaching the Bank of England inflation target faster than expected saw the GBP/USD falling to the lowest level since mid-December 2017 and also the fresh 2018 low of 1.3305.

The UK retail sales published the day after the inflation data covered slightly up with total retail sales rising 1.6% m/m in April, double the expectation, while the core retail sales 1.2% m/m in April. 

The Friday’s data on the first quarter UK GDP confirming the preliminary reading of 0.1% quarterly and 1.2% y/y rise saw GBP/USD falling off the gain made on the back of the retail sales data.

For the final week of May, there is only the UK manufacturing PMI report due on Friday with the manufacturing activity expected to slow down further in May. This is unlikely to support Sterling strongly, especially given the strength of the macro data due in the US during the upcoming week.

UK economic calendar May 28-June 1 

IN the US, the economic data set scheduled for the week ahead is much more intensive. The most important data news will be published on Friday, June 1st with the US non-farm payroll report. The US labor market is expected to have created some 190K new jobs in May and such expectations are set to be released also next Wednesday with private ADP employment report.

The US GDP revision for the first quarter is also scheduled for next Wednesday together with the core personal consumption expenditure (PCE) index in April. While the US Q1 GDP is expected to have picked up to 2.4% quarterly annualized growth rate, the core PCE is set to decelerate slightly in April.

Apart from this macro giant news, the duo of the regional Federal Reserve Bank officials is scheduled to speak next week including St. Louis Federal Reserve Bank President James Bullard and Atlanta Federal Reserve Bank President Raphael Bostic and the Fed’s Beige book is out.

UK economic calendar May 28-June 1 

 
Forecast for the next week

While the FXStreet Forecast Poll expected the GBP/USD to end this week at 1.3477, the actual spot price of GBP/USD at the time of completing this report was 1.3310, some 167pips off the prediction. Compared to the prediction two weeks when the FXStreet Forecast Poll was almost 100% sharp with the prediction of the spot price for one week ahead, this means a further deterioration. 

The deterioration was caused by the unexpectedly strong deceleration of the UK inflation in April that caused further re-pricing of the probability of the Bank of England hiking rates that has now moved to February next week.

For the next week, the FXStreet Forecast Poll expects the sideways trend to prevail with the median forecast of 1.3345, actually, the one-week prediction is higher than current spot rate at the time of writing. As the GBP/USD fell more than 1,000 pips lower during the last five weeks and the currency broke below key support zone of 1.3460-1.3500, the 45% majority of bearish forecasts took over for next week compared to 32% of Bullish forecasts and 23% of sideways predictions.

As long as longer-term forecasts are concerned, the FXStreet Forecast Poll expects GBP/USD to reach 1.3520, almost unchanged from last week’s 1.3543 level in 1-month time and down from 1.3609 forecast expected two weeks ago. In three months time from now, FXStreet Forecast Polls sees GBP/USD at 1.3658, also lower than 1.3717 predicted last week and, down from 1.3743 expected two weeks ago. 

FXStreet Forecast Poll