GBP to USD Forecast: BoE and Fed Decisions Key Amid Sterling Slide

Highlights

• GBP/USD experienced a decline of 0.22% on Friday, capping a bearish week.
• UK inflation and BoE’s anticipated policy decisions could rock GBP’s boat this week.
• The Fed’s contrasting stance may boost the dollar, with interest rate decisions in focus.

Overview of the Friday Session

The GBP to USD pair declined by 0.22% on Friday. Three sessions in the red left the GBP/USD down 0.67% to $1.23808 for the week. The GBP/USD pair rose to a high of $1.24459 before falling to a low of $1.23785.

Recessionary Jitters Leave the GBP/USD Defensive

It is a pivotal week for the GBP/USD this week. UK inflation figures will likely influence the BoE monetary policy decision on Thursday. Late in the week, UK retail sales and private sector PMIs will reflect the current macroeconomic environment.

Importantly, recent economic indicators support expectations of a UK economic recession. On Thursday, the Bank of England could add to the recessionary jitters. Economists expect the BoE to raise interest rates by 25 basis points to 5.50%.

Higher rates impact spending power, leading to a pullback in consumption and demand-driven inflationary pressures. Additionally, private consumption accounts for over 60% of the UK economy. A weakening consumption outlook would further fuel investor fears of a lengthy UK recession.

US Economic and Monetary Policy in the Spotlight

The US Federal Reserve will also deliver its interest rate decision this week. In contrast to the BoE, the Fed does not face the risk of tipping the US economy into a deep recession.

Macroeconomic conditions favor the dollar. Significantly, the Fed may leave one final rate hike on the table, tilting monetary policy divergence toward the dollar.

With the markets expecting the Fed to hit the pause button in September, the FOMC economic projections will be the focal point. Bets on a November Fed rate hike could surge if the Fed revises growth and inflation forecasts upwards and revises unemployment forecasts downwards.

Today, investors will likely grapple with the uncertainty about the Fed interest rate trajectory and the UK economic outlook.

Short-Term Forecast

Monetary policy and macroeconomics favor the US dollar. However, the Fed and the BoE are in the driving seat and could materially influence the near-term GBP/USD trajectory. A hawkish Fed pause would likely trump a BoE rate hike and support a GBP/USD return to sub-$1.23. A 25-basis point BoE rate hike could push the UK economy into a prolonged recession.

GBP to USD Price Action

Daily Chart

The GBP/USD pair remained below the 50-day and 200-day EMAs, affirming bearish price signals. A return to sub-$1.2350 would support a GBP/USD move to the $1.22150 support level.

However, a break above the $1.24410 resistance level would give the bulls a run at the 200-day EMA.

Market risk sentiment, views on the UK and US economies, and central bank policy intentions will provide direction.

The 14-period daily RSI reading of 31.92 indicates the GBP/USD pair can fall to $1.2350 before entering oversold territory.

4-Hourly Chart

The GBP/USD sits below the 50-day and 200-day EMAs, reaffirming bearish price near-term signals. A GBP/USD break above the $1.24410 resistance level would support a GBP/USD move toward the 50-day EMA.

However, failure to break above the resistance level would give the bears a run at sub-$1.23 and the $1.22150 support level.

Negative sentiment toward the UK economic outlook aligns with the EMAs, supporting a fall to sub-$1.23.

With a 35.93 reading on the 14-period 4-hourly RSI, the GBP/USD can fall to $1.2350 before entering oversold territory.