- GBP/USD breaks new ground
- The technical outlook is currently constructive
- This week's focus is on US inflation and UK wages.
- Rising stock market also provides a tailwind
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Sterling could hit multi-month highs against the dollar this week on the back of positive technicals. However, a downturn in UK wage data or an upturn in US inflation data could cause a sharp decline.
Last Friday, the pound-to-dollar exchange rate continued to rise for six days, reaching a new 2024 high of around 1.2850, the highest level since July 2023.
The rally was largely a function of a broader pullback in the U.S. dollar following a series of softer-than-expected U.S. economic announcements, culminating in Friday's soft wage data and the Federal Reserve's position to cut interest rates. There is a growing belief that there is a June.
The massive 0.45% daily rise in GBP/USD indicates that the technical environment is becoming increasingly positive, with City Index analyst Fawad Razaqzada saying, “The path of least resistance is It's clearly heading towards an upside.”
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“We will be looking for bullish buying on short-term pullbacks to previous resistance levels. These levels include the December high of 1.2828, followed by the round handle at 1.2800 and previous resistance levels. 1.2760,” Razakzada said.
On the upside, Citi Index analysts say there is no immediate reference point until July's high of 1.3140.
“Beyond this level is the psychologically important 1.30 handle, which is my main upside target,” he added.
British pound is the best performing G10 currency in 2024 as sentiment towards the UK economy improves, with the UK widely expected to emerge from recession in the second half of 2023, given broad improvement in UK Economic Survey data has been done.
“I would venture to say that the strength of the pound is also a sign of confidence in the UK after a pretty disastrous few years,” said Kathleen Brooks, an analyst at XTB.
Markets also believe that the Bank of England could follow the lead of the Federal Reserve (Fed) and the European Central Bank (ECB) in cutting interest rates, supporting UK bond yields relative to other countries. It is driving demand for the British pound.
The risk is that upcoming data that encourages markets to raise bets on a June rate cut challenges this narrative, prompting a reversal of recent outperformance. Even a small mistake could be enough to free you from the recent rally.
With this in mind, all eyes will be on Tuesday's UK wages data, with any undershoot potentially causing a noticeable decline in the pound-dollar and other pound exchange rates.
The market is expecting a 5.7% increase in January (including bonuses) and 6.2% excluding bonuses.
Stay tuned for the monthly GDP statistics released on Wednesday. A 0.2% month-on-month increase is expected in January.
If either GDP or wages data come in above consensus, it could help the pound rise.
“The quality of data is likely to influence MPC decisions as members debate the appropriateness of the current policy stance. With that in mind, while the UK labor market remains tight, We expect to see evidence that the UK economy has recovered in early 2024, which could delay any decision on further interest rate cuts and make sterling more attractive.'' Credit Agricole Currency Research Director Valentin Marinov said:
Key events for the dollar next week will be the release of February inflation data on Tuesday and retail sales figures on Thursday.
The market expects CPI inflation to be 0.4% month-on-month and 3.1% year-on-year. Core CPI numbers are likely to be more significant, with expectations of 0.3% month-over-month and 3.7% year-over-year.
Given the solid decline in the US dollar in recent days, we expect more surprises with above-consensus forecasts. This is because it would undermine the narrative that all signs currently point to a June rate cut.
Therefore, we would expect a strong reaction to a rise in the US dollar (a decline in the pound-dollar value) in any given beat. An undershoot could extend the recent downtrend.
“Investors will pay particular attention to any upside surprises from inflation data that could support the USD ahead of the March 20th FOMC meeting. “We may reassess the Fed's outlook in response to stronger momentum, making the US dollar more attractive once again,” Marinoff said.
February retail sales are expected to be 0.5% month-on-month on Thursday, and if it beats consensus, the US dollar is expected to react significantly higher.
The dollar heads into another week with renewed confidence that the Fed will cut interest rates in June. In fact, a 25 basis point cut in June is fully priced in after last week's jobs report showed wage pressures easing.
“We are waiting for further confidence that inflation is on a sustained path toward 2%,” Fed Chairman Jerome Powell told lawmakers last week. “Once we have that confidence, and it's not too far away, it would be appropriate to reduce the level of restrictions to avoid pushing the economy into recession.”
Also, keep an eye on broader risk sentiment in the coming days, as the dollar currently appears to be reacting to continued sentiment improvement.
“Risk sentiment has been the biggest driver of USD action in recent weeks, and it has moved firmly back in the direction of triggering USD weakness. There are good reasons for this change, such as the recovery in various global PMIs.'' says Dominic Banning.
If the market continues to rise, we expect the pound-dollar to follow suit.
“The global risk-on environment and attractive long-term valuations were a tailwind, driving net long positions in GBP/USD to the highest level since August last year. “This is likely to support GBP/USD as well,” reads United Overseas Bank's (UOB) monthly forecast note.
UOB maintains a bullish view on GBP/USD, with latest forecasts of 1.30 for Q2 '24, 1.32 for Q3 '24, 1.34 for Q4 '24 and Q1 '25. It is 1.35.
