GBP to USD Forecast: How British Pound Wrestles With UK Recession Risks and Inflation Woes

Highlights

• The GBP/USD rallied 0.61%, ending at $1.27205 on Wednesday.
• Despite falling retail sales, wage growth and inflation remain challenges for the UK.
• Bank of England Chief Economist Huw Pill comments on inflation and monetary policy are awaited.

The Wednesday Overview

On Wednesday, the GBP to USD rallied by 0.61%. Following a 0.34% gain on Tuesday, the GBP to USD ended the day at $1.27205. A choppy day saw the GBP to USD fall to a low of $1.26186 before rising to a high of $1.27462.

Bank of England Chief Economist to Move the Dial

Investor sentiment toward the UK economy and Bank of England monetary policy goals have left the GBP/USD short of $1.28.

Weaker-than-expected UK economic indicators weighed on investor sentiment toward two BoE interest rate hikes. With the UK private sector taking a hit in August and the UK economy barely expanding in Q2, the UK remains at risk of a UK recession.

However, wage growth and inflation remain bugbears despite the larger-than-expected fall in UK retail sales.

Considering the current dynamic, we expect increased sensitivity to Bank of England commentary. Hawkish chatter could fuel bets on further BoE rate hikes to tackle inflation at the expense of the UK economy.

Today, Bank of England Chief Economist Huw Pill is on the calendar to speak. Comments relating to inflation, monetary policy, and the UK economy will draw interest.

US Core PCE Price Index in the Spotlight

The US Core PCE Price Index and personal spending figures will influence investor sentiment toward Fed policy goals. Softer labor market numbers eased bets on further Fed rate hikes. However, a pickup in inflationary pressure would force the Fed to make a move. A more marked increase in personal spending would further pressure the Fed.

While labor market conditions have loosened, the Fed will likely continue to consider labor markets tight. Wage growth continues to support spending, fueling demand-driven inflation.

Economists forecast the Core PCE Price Index to increase 4.2% year-over-year in July versus 4.1% in June. Personal spending expectations are also upbeat. Economists expect personal spending to increase 0.6% versus 0.5% in June.

The shift in sentiment toward the Fed narrowed monetary policy divergence in favor of the Pound. However, hotter-than-expected US economic indicators could tip the scales in favor of the dollar.

GBP to USD Price Action

Daily Chart

The GBP to USD looks poised for a breakout from the 50-day EMA to target the $1.2785 – $1.2862 resistance band. However, the GBP/USD would need hawkish BoE chatter and softer US stats to support a breakout.

Dovish BoE commentary and hotter-than-expected US numbers would bring sub-$1.2650 into view.

Considering the 14-Daily RSI at 50.49, the markets are on the fence ahead of the US numbers and Huw Pill commentary.

4-Hourly Chart

The 4-Hourly Chart sends bullish price signals. After the gains on Wednesday, the GBP/USD holds above the 50-day EMA, supporting a run at the $1.2785 – $1.2862 resistance band. However, BoE chatter and the US economic indicators must be Pound-friendly to break out from the 200-day EMA.

Considering the 64.18 14-4H RSI reading, the GBP/USD has room to run before hitting overbought territory. However, hotter-than-expected US numbers and dovish BoE chatter would bring the 50-day EMA and sub-$1.2650 into play.