GBP to USD Forecast: Sterling Navigates BoE Signals Amid US Labor Focus

Highlights

• The GBP to USD rose by 0.34% on Tuesday, following a 0.19% gain on Monday, ending the day at $1.26433.
• The US economic calendar focuses on ADP nonfarm employment change figures for August following a larger-than-expected slide in JOLTs Job Openings.
• Weaker labor market conditions and a pullback in consumer confidence would weigh on consumer spending and support Fed efforts to bring inflation to target.

The Tuesday Overview

On Tuesday, the GBP to USD rose by 0.34%. Following a 0.19% gain on Monday, the GBP to USD ended the day at $1.26433. A choppy day saw the GBP to USD fall to a low of $1.25626 before rising to a high of $1.26548.

UK Credit Conditions: An Economic Litmus Test

The Bank of England will be the focal point today. With the markets expecting the BoE to hike rates after the summer break, the risk of a UK economic recession has increased after the latest economic indicators.

This morning, mortgage approvals, lending, and net lending to individuals will draw interest. In a deteriorating macroeconomic environment, banks tighten credit terms to limit the effects of an economic slowdown on nonperforming loans. A sharp fall in mortgage approvals and lending figures would support the gloomier outlook for the UK economy.

Economists forecast the BoE to report consumer credit to fall from £1.661 billion to £1.300 billion in July and for mortgage approvals to fall from 54.662k to 51.000k.

For the housing sector, a slide in demand would affect house prices and consumer confidence. A downward trend in consumer confidence would weigh on consumer spending and ease demand-driven inflationary pressures. While this would be good news for the Bank of England, the increasing chance of a UK recession continues to cap the upside for the Pound.

With the Bank of England in focus, investors should monitor BoE commentary throughout the day. However, no BoE MPC members are on the calendar to speak, leaving chatter with the media to move the dial.

The Bank of England silence won’t last long. BoE Chief Economist Huw Pill is on the calendar to speak on Thursday and Friday. We expect GBP/USD sensitivity to comments on inflation, the UK economy, and monetary policy.

US ADP Nonfarm Employment and GDP Numbers in Focus

While the UK economic calendar focuses on credit conditions, investors will return their focus to the US labor market.

ADP nonfarm employment change figures for August will draw interest. Following the larger-than-expected slide in JOLTs Job Openings, a smaller-than-expected rise in nonfarm employment would support the Fed ending its monetary policy tightening cycle.

Weaker labor market conditions and the pullback in consumer confidence would weigh on consumer spending. A downward trend in consumption would ease demand-driven inflationary pressures and support Fed efforts to bring inflation to target.

Other US economic indicators include second-estimate GDP numbers, housing sector figures, and trade data. However, barring a downward revision to the GDP estimate, we don’t expect the stats to have a material impact on the Fed.

GBP to USD Price Action

Daily Chart

Resistance at $1.2650 continued to leave the GBP/USD short of the 50-day EMA and the $1.2785 – $1.2862 resistance band. Bank of England lending and US ADP nonfarm employment change numbers must be GBP/USD friendly to support a breakout from $1.2650.

An unexpected rise in consumer credit lending and mortgage approvals would deliver early support. However, a smaller-than-expected increase in nonfarm employment would bring the 50-day EMA into play. A move through the 50-day EMA would give the bulls a look at $1.28.

Considering the 14-Daily RSI at 40.58, the GBP/USD has plenty of room to fall before entering oversold territory. Hotter-than-expected US economic indicators would bring the $1.2520 – $1.2440 support band and the 200-day EMA into view.

4-Hourly Chart

The 4-Hourly Chart sends bearish price signals. Despite the gains on Tuesday, the GBP/USD failed to break through the 50-day EMA, leaving the GBP/USD under pressure.

US ADP nonfarm employment change numbers must disappoint to support a breakout from the 50-day EMA to target the 200-day EMA and the $1.2785 – $1.2862 resistance band. However, hotter-than-expected numbers would leave the $1.2520 – $1.2440 support band in play.

Considering the 14-4H RSI reading of 48.43, the GBP/USD has room to fall before hitting oversold territory.