The GBP/USD exchange rate will be one of the most volatile currency pairs this week as the Federal Reserve and the Bank of England (BoE) deliver their interest rate decisions. It has retreated to the important support at 1.2800, down from the year-to-date high of 1.3043.
Federal Reserve and NFP data
The GBP/USD pair will be in focus as investors focus on last week’s economic data. According to the Bureau of Labor Statistics (BLS), the economy expanded by 2.6% in the second quarter, beating the expected increase of 1.8%.
In another report, the agency said that inflation continued dropping in June, with the headline and core figures falling to 2.5% and 2.6%, respectively. While it remains above the Fed’s target of 2.0%, there are signs that it is moving in the right direction.
Meanwhile, the other important data to watch will come out on Tuesday when the Conference Bureau publishes its consumer confidence report. Economists expect the data to show that consumer confidence dropped slightly in July.
The other event to watch will be the upcoming Federal Reserve interest rate decision on Wednesday. Most economists expect the Fed will leave interest rates unchanged between 5.25% and 5.50%.
Interest rates have remained above that level for months as it continued battling against inflation.
Most importantly, the view is that the Fed will start cutting interest rates in September this year. The bank is now more focused on the labor market, which has shown some cracks in the past few months. ING analysts said:
“The Federal Reserve will still leave monetary policy unchanged at next week’s FOMC meeting, but we believe they will use it to offer the clearest hint yet that they’re starting to seriously consider an interest rate cut.”
For example, the unemployment rate has risen slightly to 4.1%, its highest point since 2021. It has risen constantly from last year’s low of 3.5%.
The other main GBP/USD news will be Friday’s non-farm payroll (NFP) data. Economists expect the numbers to reveal that the unemployment rate remained at 4.1% in July as the economy added over 177,000 jobs. It had previously added 206,000 in June.
Bank of England rate decision
Across the pond, the Bank of England (BoE) is also expected to deliver its interest rate decision on Thursday.
Like in the US, UK’s inflation has dropped gradually in the past few months, helped by energy prices. The most recent data revealed that the headline CPI numbers dropped to 2.0% in June and there are signs that the trend will continue.
At the same time, cracks are emerging in the labor market, where the unemployment rate has remained above 4.4%.
On the positive side, there are signs that the UK economy is doing well. It expanded by 0.4% in May, double what analysts were expecting. A report released on Monday showed that mortgage lending rose to £2.65 billion in June while net lending to individuals jumped to £3.1 billion.
Last week, a report by S&P Global noted that the manufacturing and services PMIs remained above 50 in July.
Therefore, analysts have mixed opinions on what to expect in the coming meeting. The vast majority of analysts expect that the BoE will deliver its first interest rate cut in this meeting since it has achieved its inflation goal. In a note, analysts at ING said:
“We expect a 25 basis point rate cut from the Bank of England this week and if we’re right, that could take 10-year yields below 4% and present a clear downside threat for GBP/USD.”
However, other analysts expect that the bank will embrace a wait-and-see approach in this meeting. Besides, while inflation has dropped in the past few months, the core inflation has remained above 3%.
Huw Pill, the Bank of England’s (BoE) Chief Economist is on record saying that the country’s inflation was still strong.
GBP/USD technical forecast
GBP/USD chart by TradingView
The GBP to USD exchange rate has drifted downwards in the past few days as investors predicted a potential divergence between the Fed and the Bank of England. This divergence will widen the spread between the UK and the US, creating a good carry trade favouring the US dollar.
The daily chart shows that the GBP/USD pair peaked at 1.3043 last week and formed a shooting star candle. In most cases, this is one of the most bearish patterns in the market, which explains why it has dropped recently.
The GBP/USD pair has now dropped below the key support at 1.2895, its highest level in March this year. It is also nearing the first support of the Andrew’s pitchfork tool.
On the positive side, it has remained above the 50-day moving average. Therefore, the pair will likely drop and retest the support at 1.2790 and then resume the bullish trend. The alternative scenario is where the GBP to British pound bounces back as buyers target the year-to-date high of 1.3043.
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