GBP to USD Forecast: Sterling and the Delicate Balance of Central Bank News

Highlights

• GBP to USD saw a volatile Friday, peaking at $1.27127 before settling at $1.25857, up 0.07% for the week.
• UK Chancellor Jeremy Hunt anticipates inflation easing to 5% by the end of 2023, aligned with BoE’s 4.9% projection.
• Bank of England’s Andrew Bailey to shed light on policy intentions at the upcoming Joint Treasury hearing.

The Friday Overview

The GBP to USD slid by 0.68% on Friday. Following a 0.38% loss on Thursday, the GBP to USD ended the week up 0.07% to $1.25857. A choppy Friday session saw the GBP/USD rise to a high of $1.27127 before falling to a low of $1.25773.

Inflation Outlook to Test Hawkish BoE Bets

On Saturday, the UK Chancellor of the Exchequer, Jeremy Hunt, gave consumers the hope of a marked easing in inflationary pressures. Hunt reportedly said inflation would decline to around 5% by the end of 2023.

However, the UK Chancellor warned of a ‘blip’ in September before the decline to around 5%. The 5% number aligns with the BoE projection for inflation to ease to 4.9% by the end of 2023.

Bets on two further BoE rate hikes have subsided, but a final 25-basis point rate hike remains on the table. Wage growth and core inflation remain bugbears for the Bank of England. Upward trends in wage growth counter the effects of interest rate hikes and drive consumer spending. A pickup in consumer spending would fuel demand-driven inflationary pressures.

Considering the latest UK government updates on inflation, BoE commentary needs consideration. However, no Bank of England MPC members are on the calendar to speak today, leaving comments to the media to influence.

On Wednesday, the markets will get a sense of BoE policy intentions. BoE Governor Andrew Bailey and the team will attend the Joint Treasury Select Committee Hearing for the July Financial Stability Report and the August Monetary Policy Report. The Bank of England may take the opportunity to leave two rate hikes on the table.

There are no UK economic indicators for investors to consider before the BRC Retail Sales Monitor Report (Tues).

Fed Hawks Could Test the Pause Theory

Market bets on Fed rate hikes have fallen significantly in response to the latest US economic indicators. However, the Fed hawks may still consider inflation too high and labor market conditions too tight.

Hawkish Fed commentary could raise bets on one final Fed rate hike before hitting the brakes. No FOMC members are on the calendar to speak. However, investors should monitor the news wires for Fed commentary.

With the US markets closed for Labor Day, there are no US economic indicators to move the dial.

Immediate Forecast: BoE Versus the Fed

Monetary policy divergence favors the BoE and the Pound. However, the UK economy remains at risk of a recession. In contrast, the US economy remains robust, suggesting the BoE could be the first to cut rates in 2024. Central bank commentary will need monitoring throughout the session. The GBP/USD is at risk of another pullback on hawkish Fed chatter and UK recessionary jitters.

GBP to USD Price Action

Daily Chart

The GBP/USD remained below the trend line and the 50-day EMA. After two failed attempts to break above the 50-day EMA and trend line, further losses are on the table. A return to $1.2550 would bring sub-$1.25 and the 200-day EMA into play. However, the bears need dovish BoE chatter and hawkish Fed comments to fuel another sell-off.

Avoiding $1.2550 would give the bulls a run at the $1.26815 resistance level.

Considering the 14-Daily RSI at 41.33, the GBP to USD has more room to fall before entering oversold territory.

4-Hourly Chart

The GBP/USD remains below the 200-day and 50-day EMAs and the $1.26815 resistance level. Avoiding a return to $1.2550 would give the bulls a run at the 50-day EMA. A break above the 50-day EMA would offer GBP relief. However, BoE commentary must be hawkish and supportive of a rosier economic outlook to fuel a breakout.

A fall to $1.22550 would bring $1.25 and the $1.24410 support level into view. Hawkish Fed commentary and the threat of two BoE rate hikes and a UK recession would weigh.

Considering the 41.34 14-4H RSI reading, downside risks remain. The GBP/USD has more room to fall before entering oversold territory.