GBP to USD Forecast: The Pound’s Fate Tied to Bank of England’s Inflation Dilemma

Highlights

• Wednesday saw GBP/USD fall by 0.39%, wrapping the day at $1.23433.
• BoE’s anticipated decision could shift the Pound’s trajectory amid easing inflationary pressures.
• Fed Chair Powell emphasizes a data-driven approach; jobless claims to guide the Fed’s rate path.

Overview of the Wednesday Session

On Wednesday, the GBP to USD pair declined by 0.39%. Following a 0.08% gain on Tuesday, the GBP/USD ended the day at $1.23433. The GBP/USD pair rose to a high of $1.24214 before sliding to a Wednesday low of $1.23317.

A Day of Reckoning for the Bank of England

The Bank of England (BoE) will deliver its interest rate decision on Thursday. Economists expect the Bank of England to raise interest rates by 25 basis points to 5.50%. The BoE is combating wage growth and sticky demand-driven inflationary pressures. Wage growth fuels consumption and demand-driven inflation.

A higher interest rate environment affects disposable income and spending power. UK consumption accounts for over 60% of GDP, leaving the UK at risk of a recession due to weak consumption.

However, UK inflation figures for August raised hope that the BoE could avoid pushing rates higher.

A 25-basis point interest rate hike would shift the market focus to the MPC meeting minutes, inflation letter, and BoE commentary. The Bank of England expects sharply softer inflation before the end of the year. A dovish interest rate hike and gloomy economic outlook would weigh on buyer appetite for the Pound.

US Jobless Claims to Keep Fed Rate Path on Track

US Jobless Claims will take center stage later today. On Wednesday, Fed Chair Powell announced that further policy moves will be data-dependent. A modest increase in US jobless claims would align with the FOMC economic projections for unemployment and the Fed rate path.

Economists are forecasting an increase in initial jobless claims from 220k to 225k.

Other stats include the Philly Fed Manufacturing Index and existing home sales. The Philly Fed Manufacturing Index will likely garner more investor interest. Investors will closely watch for any reasons that might prompt the Fed to deviate from its more hawkish rate path. Economists forecast the Philly Fed Manufacturing Index to fall from 12.0 to -0.7.

Short-Term Forecast

The GBP/USD trajectory sits in the hands of the BoE. A BoE rate hike risks a more prolonged UK recession, possibly hastening a BoE interest rate cut. Meanwhile, the Fed reduced the likelihood of a 2024 rate cut, tilting policy divergence toward the dollar.

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 above the $1.24410 resistance level would support a GBP/USD move to the 200-day EMA. However, the GBP/USD would need a hawkish BoE rate hike to target the 200-day EMA.

Failure to break above the $1.24410 resistance level would leave the $1.22150 support level in play. A dovish BoE rate hike or unexpected pause on lifting rates would send the GBP/USD pair to sub-$1.23.

The 14-period daily RSI reading of 27.35 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 GBP/USD break above the 50-day EMA and $1.24410 would support a GBP/USD move toward the 200-day EMA.

Selling pressure should intensify at the $1.2427 – $1.2440 range. The 50-day EMA is confluent with the resistance level.

Failure to break above the 50-day EMA would bring sub-$1.23 and the $1.22150 support level into play.

With a 34.63 reading on the 14-period 4-hourly RSI, the GBP/USD can fall to $1.23 before entering oversold territory.