The Bank of England did not live up to its bank interest rate forecast last Thursday, which rose to 4% on the day, while also acknowledging the risk that borrowing costs would rise further over the coming months.
The GBP/USD exchange rate gave up almost all of its January gains last week, but could now benefit from buying lower around a close group of technical support if Friday’s rally in the US proves to be a response. An act that quickly fizzled out in the end.
The pound sterling suffered heavy losses along with several other currencies on Friday after the January non-farm payrolls report faded once and for all to all notions of the US labor market being nowhere near as cold as required by the Federal Reserve, or the economy is on the way to recession.
The losses of the GBP/USD currency pair reached the vicinity of the 1.2000 psychological support level, the lowest of the currency pair’s performance in a month.
Overall, job gains in January forced Fed Funds rate futures back above the 5% handle in a partial reversal of declines that began in November when low inflation and prospects for reopening the Chinese economy tipped expectations for further increases in borrowing costs.
“The rebound in employment suggests the US is (still) barely in recession territory, and there is still a risk that the cycle needs to be extended. The latter will add to currency headwinds with housing markets more vulnerable,” said Michael Cahill, Forex Analyst at Goldman Sachs.
“Partly for this reason, we are adding a trade recommendation for investors to buy EUR/SEK and take profit from shorting GBP/CHF,” he added.
Analysts added that last week’s economic news should be viewed as “fairly positive” for the US dollar, suggesting that the British pound may struggle for much of any potential recovery in the coming days, especially in light of last Thursday’s update from the Bank of England.
The Bank of England did not live up to its bank interest rate forecast last Thursday, which rose to 4% on the day, while also acknowledging the risk that borrowing costs would rise further over the coming months.
“Any dovish comments from Powell or other FOMC members about peak inflation will drive the dollar lower this week in our view,” says Joseph Capurso, head of international economics at the Commonwealth Bank of Australia. “The GBP/USD pair could rise this week if the dollar weakens as we expect,” the analyst added.
Eyes are on the Federal Reserve
The big risk for GBP/USD this week is that Fed officials begin to prepare the market for a March increase in their estimates and projections of how US interest rates will eventually rise until they can be confident that inflation will return to its 2% target.
Just last week, Fed Chairman Jerome Powell said at a February press conference that a few quarter-percent increases in the federal funds rate might be all that is needed to see inflation return, and wage growth has continued to falter in recent months
A softening of US wage growth could mean that inflation could return to target even with unemployment remaining at historically low levels. This would obviate any need for higher interest rates, although everything depends on how FOMC members view the issue. FOMC for data.
There is some chance that the pound will benefit if Fed officials signal their willingness to be patient before looking back at their interest rate outlook, although much about rate action this week is also likely to depend on comments from BoE MPC members. They are due to hit the speakers’ circle en masse ahead of the release of fourth-quarter GDP data from the UK on Friday, which is set to decide whether or not a recession has really begun.
GBP/USD Forecast
The direction of the sterling currency pair against the US dollar, GBP/USD, turned bearish. This will enhance the stability of the currency pair below the psychological support of 1.2000, which is the closest to oversold levels.
On the other hand, and for the same time period, the bulls will not control the trend again without moving above the 1.2340 resistance again. The performance of the US dollar today will be affected by new statements from US Federal Reserve Governor Jerome Powell.
