British Pound Forecast: GBP/USD Enters a Key Period With Everything to Play For

GBP/USD Key Points

• GBP/USD slipped last week on a moderately dovish BOE – Tuesday’s UK jobs report and Wednesday’s US CPI report will be the key releases to watch in the coming week.
• For GBP/USD traders, the evolution of the interest rate gap between the UK and US will be perhaps the most important factor to monitor
• Only a break and close above the 1.2600 level would shift the near-term odds in favor of more upside in GBP/USD.

GBP/USD: The Week that Was

Cable had an adventuresome week, fading from its Monday peak  near 1.2600 all the day down to trade in the mid-1.2400s in the immediate wake of the Bank of England (BOE) meeting before recovering into Friday’s close. As I noted in my BOE Instant Reaction video on Thursday (below), Governor Bailey and Company inserted a series of subtle hints that an interest rate cut may be coming sooner rather than later, though traders are still split on whether that will be at the BOE’s next meeting in June or in two meetings’ time (August):

While not exactly a top-tier report, the Q1 GDP reading out of the UK beat expectations on Friday, showing 0.6% growth in the economy quarter-over-quarter, two ticks above the 0.4% reading expected. More stronger-than-expected UK data on growth, inflation, and – crucially for next week (see the economic data to watch below) – jobs could be enough to push the start of the easing cycle toward August, within a month of when traders expect the Fed to kick off its own series of interest rate cuts.

GBP/USD: Everything to Play for This Week

As of writing, traders are still near evenly split on whether the BOE will cut interest rates in June (58% likely, per Bloomberg’s OIS model) or August (42%), leaving plenty to play for over the next five weeks until the June BOE meeting.

With so much ambiguity around the timing of Governor Bailey and Company’s next move, economic data will take on abnormal significance in the coming weeks, starting with Tuesday’s UK Employment report (see the full run of UK economic releases for this week below), followed by the UK CPI report the following week. Indeed BOE Member Pill underscored the significance of the data in his comments Friday, noting that “labour market and wage data will have the biggest impact” on the BOE’s timeline.

For GBP/USD traders, the evolution of the interest rate gap between the UK and US will be perhaps the most important factor to monitor. As it stands, traders are pricing in about 2.25 interest rate cuts from the BOE this year, but only about 1.65 from the US, meaning that the current ~10bps spread between the Fed’s benchmark rate and the BOE’s primary interest rate could gradually grow as we move through the year. If that expected spread widens (say because Tuesday’s UK employment report or next week’s UK CPI reading come in soft), GBP/USD could fall toward the year-to-date lows under 1.2400 next.

UK Economic Data to Watch This Week

In addition to the high-impact US data on tap this week, highlighted by Fed Chairman Powell’s speech and PPI on Tuesday, followed by the highly-anticipated US CPI report on Wednesday, there are also some key UK reports for GBP/USD traders to watch as well:

Monday

No notable UK economic data.

Tuesday

UK Employment Report (Mar)

BOE Member Pill Speech

UK Labor Productivity

Conference Board Leading Index

Wednesday

10yr Gilt Auction

Thursday

BOE Member Greene Speech

Friday

BOE Member Mann Speech

British Pound Technical Analysis – GBP/USD Daily Chart

Source: TradingView, StoneX

As the chart above shows, GBP/USD found support at a key near-term level near 1.2470, finishing last week only slightly lower than where it started. However, the more well-established bearish trend line off the March highs looms just above current rates in the mid-1.2500s, so technical traders will have to make up their minds about which level is more significant sooner rather than later.

From a purely technical perspective, the risk seems tilted to the downside as long as resistance in the mid-1.25s (conveniently near the 200-day MA) holds, with a confirmed break below 1.2470 opening the door for a deeper drop toward the mid-1.23s. Only a break and close above the 1.2600 level would shift the near-term odds in favor of more upside in GBP/USD.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX