GBP to USD Forecast: UK Pound’s Fate Hangs on Middle East Crisis and PMI Data

Highlights

• GBP/USD gained 0.17% on Friday, ending the week up 0.18% to $1.21632.
• On Monday, the Middle East will be in focus, as investors fear a regional conflict.
• US economic indicators also need consideration. The Chicago Fed National Activity Index will draw investor interest.

Overview of the Friday Session

On Friday, the GBP/USD rose by 0.17%. Following a 0.02% gain on Thursday, the GBP/USD pair ended the week up 0.18% to $1.21632. The GBP to USD pair fell to a low of $1.2930 before rising to a Friday session high of $1.21703.

Middle East Conflict: A Pre-PMI and Employment Data Test for Appetite

The Middle East conflict will be the focal point for investors on Monday. An escalation in the Middle East conflict may fuel heavier losses for the Pound.

Reports of Israel bombing Lebanon and firing missiles at Damascus, Syria, raised the threat level of a regional war.

An increased risk of Iran joining the conflict is likely to unsettle investors, potentially leading to a flight to the safety of the US dollar.

Investors may also consider UK employment and private sector PMIs out on Tuesday.

Softer UK wage growth and a larger-than-expected fall in retail sales painted a grim picture of the UK economy last week. Sticky inflation added to the gloomy outlook. On Tuesday, UK unemployment and Services Sector PMI numbers could pressure the GBP/USD.

The UK services sector contributes more than 70% to the UK economy. A significant contraction in the services sector would raise concerns about a possible UK recession. However, the Bank of England (BoE) may need to raise interest rates to tackle inflation. A BoE rate hike could add further pressure to the UK economy.

Higher interest rates increase borrowing costs and impact disposable income. A fall in disposable income would lead to consumers curbing spending. UK private consumption contributes over 60% to the UK economy.

Chicago Fed National Activity Index in Focus

The Chicago Fed National Activity Index (CFNAI) will garner investor interest on Monday. A pickup in economic activity would support investor bets on a December Fed rate hike. Economists forecast the CFNAI to increase from -0.16 to 0.05 in September.

Beyond the headline figure, the consumption and employment components warrant consideration.

A pickup in consumption would fuel demand-driven inflation and pressure the Fed to take a more aggressive rate path. Higher interest rates would raise borrowing costs, impacting disposable income. A decline in disposable income would force consumers to curb spending on non-essential items.

With the US economy in the spotlight, investors should monitor Fed commentary throughout the session. Support for a Fed rate hike will likely drive buyer demand for the US dollar.

Short-Term Forecast

News updates from the Middle East will influence GBP/USD trends on Monday. However, on Tuesday, UK and US private sector PMIs and UK employment figures will need consideration. Weak UK numbers would align with expectations of a UK recession, a headwind for the Pound.

GBP to USD Price Action

Daily Chart

The GBP/USD pair remained below the 50-day and 200-day EMAs, affirming bearish price signals.

A GBP/USD fall below $1.21000 would support a move to the $1.19055 support level. UK recessionary jitters and an escalation in the Middle East conflict would weigh on buyer demand.

However, a de-escalation in the Middle East conflict will likely give the bulls a run at the $1.22150 resistance level.

The 14-period daily RSI reading of 40.10 indicates a GBP/USD drop below $1.21000 before entering oversold territory.

4-Hourly Chart

The GBP/USD sits below the 50-day and the 200-day EMAs, reaffirming bearish price signals.

A GBP/USD fall below the $1.21000 handle would support a move toward the $1.19055 support level.

However, a move through the 50-day EMA would give the bulls a run at the $1.22150 resistance level.

With an RSI reading of 47.17 for the 14-period 4-hourly Chart, the GBP/USD may slide to $1.20500 before entering oversold territory.