GBP to USD Forecast: Sterling on the Defensive Amid Economic Woes

Highlights

• GBP/USD took a hit, ending Friday at $1.22348 after a brief rise to $1.22951.
• Weaker UK PMI, retail sales figures shadow Bank of England’s economic apprehensions.
• Upcoming Chicago Fed National Activity Index: key player in potential Fed interest rate adjustments.

Overview of the Friday Session

On Friday, the GBP to USD pair declined by 0.48%. Following a 0.40% fall on Thursday, the GBP/USD ended the day at $1.22348. The GBP/USD pair rose to a high of $1.22951 before falling to a session low of $1.22304.

Deteriorating Macroeconomic Conditions Leave the GBP/USD on the Defensive

The GBP/USD will likely remain under pressure today as UK economic indicators continue to signal a lengthier economic recession. On Thursday, the Bank of England hit the brakes on interest rate hikes. The GBP/USD would need economic indicators to shift sentiment toward the UK economy to alter the bearish narrative.

On Friday, weaker-than-expected services PMI and retail sales figures supported the BoE decision to leave rates unchanged.

The UK services sector remains the main contributor to the UK economy, contributing over 70% to GDP. A more marked contraction across the services sector will continue to test the buyer appetite for the Pound.

However, investors should monitor Bank of England commentary. A move away from the ‘policy pause’ script would offer much-needed support for the Pound.

Chicago Fed National Activity Index in the Spotlight

Later today, the Chicago Fed National Activity Index will draw investor interest. A larger-than-expected rise in the Index would support investor bets on a more aggressive Fed interest rate path.

Economists forecast the Chicago Fed National Activity Index to rise from 0.12 to 0.15 in August.

While the headline figure will be influence, investors should consider the employment and consumption sub-components. Tight labor market conditions and a pickup in consumption would fuel demand-driven inflationary pressures and support further Fed rate hikes. A more hawkish Fed rate path would impact the labor market and weigh on consumer spending.

Short-Term Forecast

Economic indicators from Friday have left monetary policy and economic divergence in favor of the US dollar. US economic indicators this week must align with forecasts to keep pressure on the GBP/USD. Upbeat US economic indicators would bring sub-$1.22 levels into play.

GBP to USD Price Action

Daily Chart

The GBP/USD pair sat below the 50-day and 200-day EMAs, sending bearish price signals. A break below the $1.22150 support level would support a GBP/USD fall to sub-$1.22. However, US economic indicators must be better than forecasts to deliver a fall through the $1.22150 support level.

Weaker-than-expected US economic indicators would support a GBP/USD move to $1.23.

The 14-period daily RSI reading of 23.89 shows the GBP/USD pair in oversold territory.

4-Hourly Chart

The GBP/USD remains below the 50-day and 200-day EMAs, reaffirming bearish price near-term signals. A break below the $1.22150 support level would bring sub-$1.22 into play.

However, a return to $1.23 would support a move to the 50-day EMA.

With a 31.19 reading on the 14-period 4-hourly RSI, the GBP/USD pair can break below the $1.22150 support level before entering oversold territory.