GBP to USD Forecasts: UK Unemployment and Services PMIs to Dictate Trends

Highlights

• GBP/USD rallied 0.70% on Monday, ending the session at $1.22484.
• A slide in US Treasury yields reversed early losses for the GBP/USD.
• UK employment figures and UK and US private sector PMIs will be in focus on Tuesday.

Overview of the Monday Session

On Monday, the GBP/USD rallied 0.70%. Following a 0.17% gain on Friday, the GBP/USD pair ended the session at $1.22484. The GBP to USD pair fell to a Monday session low of $1.21431 before reaching a high of $1.22586.

UK Employment and Private Sector PMIs in Focus

Employment figures and private sector PMIs for the UK will garner investor interest on Tuesday. UK retail sales figures for September raised expectations of a UK economic recession. A weaker labor market environment would signal a further pullback in consumption, with wage growth slowing.

UK consumption contributes over 60% to the UK economy. Downward trends in wage growth and elevated inflation and interest rates would impact disposable income. A further decline in disposable income would force consumers to cut spending.

Additionally, private sector PMI figures for October will also be significant. The Services PMI will have more influence on the GBP/USD. A sizeable contraction in the services sector would send more recessionary signals. The UK services sector accounts for over 70% of the UK economy.

Beyond the economic calendar, investors must monitor news updates from the Middle East. An escalation in the conflict would fuel a flight to the safety of the US dollar.

US Services Sector Activity in the Spotlight

Later today, prelim US private sector PMIs for October may influence bets on Fed rate hikes. The services sector will garner more interest, accounting for over 75% of the US economy.

Economists forecast the Services PMI to fall from 50.1 to 49.8. An unexpected increase would drive demand for the US dollar. A pickup in service sector activity would fuel inflationary pressures, possibly forcing the Fed to rethink its policy outlook.

Higher rates would impact borrowing costs and disposable income. A downward trend in disposable income could lead to a pullback in consumer spending.

Short-Term Forecast

GBP/USD near-term trends hinge on the Services PMIs and UK employment numbers. Divergence in service sector conditions will likely impact the GBP/USD pairing. However, the Middle East conflict remains a headwind.

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 GBP/USD return to sub-$1.22500 would support a move to the $1.21216 support level. Weak UK employment numbers and deeper services sector contraction would impact the demand for the Pound.

However, a return to UK service sector growth and a contraction across the US services sector could give the bulls a run at the 50-day EMA.

The 14-period daily RSI reading of 50.79 suggests a GBP/USD breakout from the 50-day EMA to target the 200-day EMA before entering overbought territory.

4-Hourly Chart

The GBP/USD sits above the 50-day EMA while remaining below the 200-day EMAs, sending bullish near-term but bearish longer-term price signals.

A GBP/USD break below the 50-day EMA would support a move to the $1.21216 support level.

However, a GBP/USD move through the 200-day EMA would bring the $1.24410 resistance level into play.

With an RSI reading of 68.03 for the 14-period 4-hourly Chart, the GBP/USD may break above the 200-day EMA before entering overbought territory.