GBP to USD Forecast: Sub-$1.27 in the Hands of the BoE

Highlights

• After disappointing manufacturing PMI numbers for July, the market focus returns to the private sector and the Bank of England.
• Finalized service PMI numbers will draw interest early in the UK session. However, the BoE interest rate decision and forward guidance will have the final say.
• Nearer-term indicators are bearish, with the bears eying $1.26.

On Wednesday, the GBP to USD fell by 0.51% to wrap up the day at $1.27105. Hawkish BoE monetary policy bets provided early support. However, the US ADP nonfarm employment numbers sent the GBP to USD into the red.

It is a big day on the UK economic calendar. Finalized services PMI numbers for July will draw interest early in the UK session. A downward revision could ease bets on two further BoE rate hikes. However, the devil will be in the details, with wage growth and output prices needing to fall sharply to shift sentiment toward a post-summer BoE rate hike.

Later in the session, the Bank of England interest rate decision will be the main driver. Investors should consider the vote count and the meeting minutes. A 25-basis point rate hike would leave the minutes to move the dial. Investors are betting on two consecutive rate hikes. A dovish rate hike would weigh on the GBP to USD.

No Monetary Policy Committee members are on the calendar to speak today, leaving Bank of England Governor Andrew Bailey to provide comments after the interest rate decision.

This morning, service sector PMI numbers from China set the tone. The Caixin Services PMI rose from 53.9 to 54.1 in July. Economists forecast a PMI of 52.5.

The US Session

It is a busy US session, with US initial jobless claims and the all-important ISM Non-Manufacturing PMI in focus. Economists forecast the ISM Non-Manufacturing PMI to fall from 53.9 to 53.0. However, investors must consider the sub-components. These include employment, new business, and prices.

The US services sector accounts for more than 70% of the US economy, making the ISM Non-Manufacturing PMI a leading indicator. Weakening service sector activity would fuel recessionary jitters. The early signs of waning service sector activity include lower staffing levels, declining new orders, and weaker output prices. Increased competition for new work leads to falling output prices.

Other stats include finalized Markit survey-based service PMI, nonfarm productivity, unit labor costs, and factory orders. However, these stats should play second fiddle to the initial jobless claims and ISM survey-based numbers.

GBP to USD Price Action

Daily Chart

The Daily Chart showed the GBP to USD sat below the $1.2862 – $1.2785 resistance band (previously the support band). Looking at the EMAs, the GBP to USD fell through the 50-day ($1.27422) while holding above 200-day ($1.24402) EMAs, sending bearish near-term but bullish longer-term price signals.

Notably, the 50-day EMA narrowed to the 200-day EMA, signaling a possible shift in momentum.

Looking at the 14-Daily RSI, the 42.84 reading sent bearish price signals. Aligned with the 50-day EMA ($1.27460), the RSI signals a fall to sub-$1.27 to bring $1.26 into view. However, a move through the 50-day EMA ($1.27424) would support a breakout from the $1.2785 – $1.2862 resistance band (previously support band) to target $1.29.

4-Hourly Chart

Looking at the 4-Hourly Chart, the GBP to USD hovers below the $1.2862 – $1.2785 resistance band (previously the support band). The GBP to USD also sits below the 50-day ($1.28329) and 200-day ($1.28035) EMAs, sending bearish near and longer-term price signals.

Significantly, the 50-day EMA narrowed on the 200-day EMA, supporting a fall to sub-$1.27. However, a GBP to USD move through the EMAs and the upper level of the $1.2862 – $1.2785 resistance band would bring $1.29 into play.

The 14-4H RSI reading of 31.79 sends bearish signals, with selling pressure outweighing buying pressure. Significantly, the RSI is aligned with the EMAs, signaling a GBP to USD return to sub-$1.27.

Price action today is hinged on the Bank of England’s monetary policy decision and forward guidance. Hints of the Bank of England hitting the proverbial brakes after summer would be a dovish interest rate hike.