The GBP/USD pair continued its strong sell-off this week as odds of a more aggressive Federal Reserve faded. After soaring to 1.3435 last month, the pair has retreated to 1.3060, its lowest point since September 11.
Federal Reserve reset
The GBP/USD pair has been in the spotlight in the last seven days after the US published strong economic numbers.
A report by the Bureau of Labor Statistics (BLS) showed that the economy added over 254k jobs last month, higher than expected. Most notably, the bureau upgraded its August jobs numbers by over 10,000. The unemployment rate improved to 4.1%, while wage growth accelerated.
The pair also reacted to Wednesday’s Federal Reserve minutes, which showed that officials were divided on whether to cut rates by 0.50% or 0.25%. Most members voted to cut rates by 0.50%, the biggest cut in over four years.
However, the statement hinted that officials would be more cautious in the next meetings. In this, they will watch more data when determining the size and the scale of the next interest rate cuts.
Recent data shows that officials will likely lean to a smaller cut in the next meeting. The labor market is not as weak as what most analysts were expecting, while inflation is not falling as fast as expected.
A report released last Thursday showed that inflation was hotter than expected. The headline Consumer Price Index (CPI) rose by 0.2% in September, higher than the expected 0.1%.
This increase translated to an annual gain of 2.4%, higher than the median estimate of 2.3%. It was the lowest inflation reading in over three years.
Core inflation, which excludes the volatile food and energy prices, rose from 3.2% to 3.3% in the same period.
Therefore, these numbers mean that the Federal Reserve will either cut by 0.25% in the next meeting or avoid cutting after all. In a statement, analysts at ING said:
“Monetary policy has been restrictive for some time and now that inflation is looking as though it is on the path to 2% it makes sense to lower borrowing costs to give the economy a little more breathing space.”
UK economic data ahead
The next important GBP/USD news will come from the UK, which will publish the latest GDP data on Friday morning.
Analysts expect the data to show that the economy grew from 0.0% in July to 0.2% in August. On an annual basis, the CPI is expected to grow from 1.2% to 1.4%.
The Office of National Statistics (ONS) will also publish the latest industrial and manufacturing production numbers. Analysts expect the two to have remained in the red in the past few months.
The next data to watch will be next Tuesday’s UK jobs data and Wednesday’s inflation report. Analysts expect the data to show that the headline CPI slipped from 2.2% to 2.1%, while the core CPI fell from 3.6% to 3.5%.
These numbers will have an impact on what the Bank of England (BoE) does in the next meeting. Analysts expect it to deliver a few cuts in the coming meetings since the economy is not doing well.
GBP/USD technical analysis
The GBP/USD exchange rate has been in a strong downward trend after peaking at 1.3430 last month. It has retreated to 1.3055, its lowest level since September 12.
The pair has moved below the key support level at 1.3140, its highest swing on July 14. It has also moved below the 50-day moving average.
Additionally, the MACD indicator has moved below the zero line, while the Relative Strength Index (RSI) has tilted downwards.
Therefore, the pair will likely continue falling as sellers target the next key support level at 1.2900.
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