GBP/USD Weekly Analysis: Dollar Pause and UK Economic Updates

GBP/USD Weekly Analysis: Dollar Pause and UK Economic Updates

The GBP/USD pair recently experienced a rebound after reaching its lowest level since March, around the 1.2100 area. This upward movement was a result of the US Dollar taking a breather after a prolonged rally, which, in turn, was facilitated by a retreat in US yields and an overall improvement in market sentiment. However, it's crucial to view this rebound as a healthy correction at this stage.

UK Economy's Resilience

The United Kingdom's Office for National Statistics (ONS) reported that in the three months leading up to the end of June, Gross Domestic Product (GDP) expanded by 0.2%, in line with the previous estimate, while Q1 figures were revised up to 0.3% from 0.1%. This indicates a stronger UK economy than previously reported.

As of June, the UK economy was 1.8% larger than it was before the COVID-19 pandemic, in contrast to earlier estimates, which indicated it was 0.2% smaller. This upward revision takes into account new estimations for 2020 and 2021. However, despite this positive data, market expectations suggest that the UK may be heading into a recession in both Q3 and Q4.

Bank of England's Precautionary Measures

In response to potential economic challenges, the Bank of England (BoE) has initiated work on a lending facility aimed at providing support to insurers and pension funds. This move is designed to prevent market turmoil similar to what occurred a year ago following the "mini-budget."

Easing Inflation in Europe

In Europe, inflation appears to be showing signs of easing, contributing to improved market sentiment. The Eurozone Harmonized Index of Consumer Prices rate dropped to 4.3% in September, marking the lowest level in nearly two years.

US Economic Data and Dollar Strength

In the US, consumer confidence figures and data from the housing sector weakened. Additionally, the Federal Reserve's preferred inflation gauge, the Core Personal Consumption Expenditure Price Index, rose by 0.1% in August, slightly below the market consensus of 0.2%. The annual rate declined from 4.3% to 3.9%, indicating a downward trajectory in inflation but still above the Fed's target. However, this data did not significantly impact market sentiment.

Looking Ahead

In the coming week, China will release PMI gauges relevant to market sentiment, which could impact the Pound positively if the data is favorable. The UK economic calendar for the week includes data releases related to home prices, the Construction PMI, and the Decision Maker Panel (DMP) survey, which gathers information from businesses of all sizes. The central bank uses this survey to monitor economic developments and track expectations.

The next significant report, the monthly Gross Domestic Product (GDP), is scheduled for release on October 12. The Bank of England decision is set for November 2, and members of the Monetary Policy Committee (MPC) will receive a new inflation report before that meeting.

Market expectations indicate a probability of around 40% for a rate hike at the next BoE meeting, rising to nearly 90% for a rate hike during the first quarter of next year. These decisions will be data-driven, taking into account factors such as inflation, wage trends, and overall economic activity.

In the US, the economic calendar focuses on employment data. However, due to a potential US Government shutdown, the market may not receive all the reports. If a shutdown occurs, critical reports like the August JOLTS and Nonfarm Payrolls may not be published.

The reports that will be released regardless of the government situation include the ISM Manufacturing PMI, the ADP Employment report, and the ISM Services PMI. The highly anticipated US jobs report on Friday is expected to show an increase of 150,000 jobs and a decline in the Unemployment Rate from 3.8% to 3.7%.

Dollar's Strength and Outlook

Fundamentally, the US Dollar remains favored in the market due to its robust economy, decreasing inflation, and high Treasury yields. However, the recent rally in the US Dollar Index (DXY) has shown signs of exhaustion as it backed away from its highs.

The likelihood of a bearish correction for the US Dollar increases if market sentiment continues to improve and US yields stabilize. However, if equity prices decline and Treasury yields remain around current levels, the US Dollar could resume its upward momentum.

The Pound's decline against the Dollar has not been characterized by panic but rather reflects the ongoing strength of the US Dollar. A correction in the GBP/USD pair may take various forms, including rallies and sharp pullbacks or consolidation, depending on technical resistance levels. Positive news for the UK economy, such as falling inflation and improved economic activity, could benefit the Pound, but the overall outlook remains influenced by a complex interplay of factors, including monetary policy decisions.

The Pound's performance will depend on data releases and Bank of England decisions in the coming weeks, while the US Dollar's direction will be determined by employment data and broader market sentiment.

Our preference

Short positions below 1.23500 with targets at 1.2100 & 1.20050 in extension.

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