The Pound hovers around $1.3125 at the start of September, having gained 2.1% in August, as expectations of monetary policy divergence between the US and the UK continue to favour the currency. Weak US economic data and Fed Chair Jerome Powell’s indications of potential rate cuts have weakened the dollar, while stronger UK economic data and the Bank of England’s cautious approach towards further rate cuts have strengthened the pound.
The BoE recently cut its key interest rate to 5% and the market expects additional cuts totalling 41 basis points by the end of the year. In contrast, the Fed is projected to cut rates by 103 basis points this year, with speculation of a possible 50 basis point cut this month.
Furthermore, the UK will release its July GDP data this week, a figure that should provide insight into the state of the UK economy and be relevant to the potential path of the Bank of England’s monetary policy. The UK economy grew strongly during the first half of the year, including a 0.6% q/q gain in Q2. Nonetheless, there was some loss of momentum in June, with GDP flat over the month.
More recently, confidence surveys for Q3 have been encouraging, including increases in the UK manufacturing and services sector PMIs in August. Against this backdrop, the consensus forecast is for a resumption of growth in July, with GDP expected to rise 0.2% m/m, services activity expected to rise 0.2% and industrial output expected to rise 0.3%. Next week will also see the release of labour market data, with average weekly earnings expected to slow to 4.1% y/y for the three months to July, and weekly earnings excluding bonuses expected to slow to 5.1% for the same period.
The recovery in economic growth as well as wage resilience will keep the Bank of England on a steady, non-accelerated path of policy rate cuts. The market expects the UK central bank to keep rates on hold in September, before lowering the next rate by 25 bps to 4.75% at its announcement in November.
From a technical perspective, GBPUSD stayed in consolidation below 1.3264 last week and the outlook is unchanged. The overall bias remains neutral and sideways trading could be seen more, unless if 1-month support breaks. However, the outlook will remain bullish as long as the 1.3043 resistance turned support remains intact. On the upside, a strong break of 1.3264 will resume the larger uptrend to the FE100% projection of 1.2298-1.3043 and 1.2664 drawdown at 1.3409. However, a strong break of 1.3043 will turn the bias back to the downside for a deeper pullback.
GBPUSD is very sensitive to global sentiment, tending to fall when stock markets are depressed. The pair is also risk sensitive but to a lesser extent. The British Pound remains in an uptrend against the Euro and Dollar, and for now, GBPUSD weakness is technical and short-term.
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Ady Phangestu
Market Analyst – HF Educational Office – Indonesia
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