GBP to USD Forecast: BoE’s Hawkish Standoff vs. US Economic Data

Highlights

• The GBP/USD rallied 0.58% on Wednesday, ending the session at $1.27978.
• Monetary policy divergence tilted toward the Pound, supporting a return to the $1.28 handle.
• On Thursday, US labor and housing sector data will garner investor interest.

The Wednesday GBP/USD Overview

On Wednesday, the GBP/USD rallied 0.58%. Following a 0.22% gain on Tuesday, the GBP/USD ended the day at $1.27978. The GBP/USD fell to a low of $1.26983 before striking a high of $1.28024.

GBP/USD Heads Higher on an Unwavering Bank of England

Recent UK economic indicators raised the threat of a UK economic recession despite the November jump in UK retail sales. The UK economy contracted by 0.1% in Q3 2023. However, the jump in retail sales could fuel demand-driven inflation and force the Bank of England to delay discussions about rate cuts.

The contrasting monetary policy decisions for December continue to resonate at the end of the year. While the Fed signaled rate cuts for 2024, three Bank of England Monetary Policy Committee members voted for a 25-basis point interest rate hike. The December policy decisions and forward guidance tilted monetary policy divergence toward the Pound.

There are no UK economic indicators on Thursday to change the narrative, supporting the GBP/USD at current levels.

However, investors must monitor Bank of England commentary. Comments relating to the economic outlook, inflation, and interest rates would move the dial.

The US Labor and Housing Markets in Focus

On Thursday, initial jobless claims and pending home sales will garner investor interest. An unexpected fall in jobless claims could test market bets on a Q1 2024 Fed rate cut.

Tighter US labor market conditions would support wage growth and disposable income. Upward trends in disposable income could fuel consumer spending and demand-driven inflation. The net effect could be delayed rate cuts to curb consumer spending and dampen demand-driven inflation.

Economists forecast initial jobless claims to increase from 205k to 210k in the week ending December 23.

Notably, economists predict pending home sales to increase by 1.0% in November. In October, pending home sales fell by 1.5%. Economists consider housing sector data as leading indicators for the US economy. An improving housing market would support consumer confidence and spending, and raise bets on a soft landing.

Beyond the stats, investors must monitor Fed commentary. References to inflation, the economic outlook, and interest rates need consideration.

Short-Term Forecast

GBP/USD trends over the near term will likely hinge on Bank of England commentary and the US economic indicators. Unwavering Bank of England support for a higher-for-longer rate path would support a GBP/USD move toward $1.30.

GBP to USD Price Action

Daily Chart

The GBP/USD held above the 50-day and 200-day EMAs, sending bullish price signals.

A GBP/USD move through the $1.28500 handle would give the bulls a run at the $1.29 handle.

The US economic calendar and central bank commentary will be the focal points.

However, a break below the $1.28013 support level would bring sub-$1.27 and the 50-day EMA into play.

The 14-period daily RSI reading of 64.56 indicates a GBP/USD return to $1.29 before entering overbought territory.

4-Hourly Chart

The GBP/USD remained above the 50-day and 200-day EMAs, with the EMAs sending bullish price signals.

A return to the $1.28500 handle would support a move to the $1.29 handle.

However, a break below the $1.28013 support level would give the bears a run at the 50-day EMA.

The 14-period RSI on the 4-hour Chart at 71.45 shows the GBP/USD in overbought territory. Selling pressure could intensify at the $1.28500 handle.