GBP/USD outlook: Currency Pair of the Week – October 7, 2024

The GBP/USD is among the major forex pairs to watch this week. After a blowout US jobs report, the market has dropped its calls for another 50 basis point rate increase from the Fed. While key inflation figures this week could provide some short-term volatility, the Fed’s focus has moved on from inflation. Therefore, beyond some short-term volatility, this should not really change the picture for US interest rates pricing and the dollar. From the UK, we will have some important figures including the monthly GDP estimate which could put more weight to BoE Governor’s call for “a bit more aggressive” easing, with more significant data to come in the following week. The GBP/USD outlook remains mildly bearish following these events.

US dollar remains on the front foot amid data strength

Friday’s blowout US jobs report sparked a hawkish shift in rate expectations, one that would have normally taken weeks. But the big rebound in bond yields with the 10-year moving above the 4.0% mark suggests investors are no longer expecting any more outsized rate cuts from the Fed this year. Meanwhile, we’ve seen more dovish signals from other major central banks, like the European Central Bank, Bank of Japan and Bank of England – more on the latter, below.

With markets now fully aligning with Fed Chair Jerome Powell's pushback against any 50bp cuts, and barring any major surprises, we likely won’t see a shift in this outlook until fresh jobs and activity data come in, starting late October. As for this week’s CPI and PPI inflation figures, well I think they’re unlikely to alter the Fed's trajectory or the dollar’s strength – unless there’s a substantial surprise. September's core CPI is expected to tick down to 0.2% month-on-month after August’s 0.3% rise, but even a softer 0.1% print probably won’t shift market focus away from the labour market. With attention now firmly on the Fed's employment mandate, any unexpected inflation reading will likely create only modest dollar volatility.

Looking ahead, outside of a potential de-escalation in the Middle East, there doesn’t seem to be much that would trigger a US dollar sell-off in the short term to the change the current GBP/USD outlook. The market has largely abandoned hopes for a 50bp cut, and inflation figures probably won’t change that. While tensions in the Middle East might not intensify further, a meaningful de-escalation seems unlikely for now. As a result, oil prices could remain elevated. And with the US presidential election just weeks away, there’s still room for markets to favour a defensive stance ahead of what could be a tight race. All else being equal, this sort of market environment should be modestly positive for US dollar.

GBP/USD outlook to remain subdued following Bailey’s dovish comments

The Bank of England Governor Andrew Bailey sent the pound tumbling in a newspaper interview last week, where opened the way to “a bit more aggressive” easing. The pound was already looking overstretched, not only on the charts but with positioning too judging by last week’s CFTC data. A good chunk of those long positions have now been closed, but there might yet be more selling to come, even if BoE’s Chief Economist Huw Pill warned against cutting too aggressively on Friday. Current UK rates pricing suggests markets are not yet fully factoring in a 25-basis point cut in November. So, there’s some more room for more dovish repricing in the weeks ahead. It would have helped if we had lots of data releases to change that this week, but we will have to do with just the monthly GDP estimate on Friday, when we will also have industrial production figures for August. However, the following week should be more interesting with the release of CPI and jobs data. You would think the UK data would have to be super-hot for the BoE governor to rethink his more aggressive rates cut view (unlikely).

GBP/USD technical analysis

Source: TradingView.com

After last week’s big drop, the technical GBP/USD outlook turned bearish after it broke below a few support levels. Some of these may now turn into resistance upon a potential re-test from below. Among then, 1.3140-50 area is the first line of defence for the bears now, with this area having served both support and resistance in the past. A similar level comes in 100 pips higher around 1.3150 area, which is now a more significant resistance level to watch. In terms of potential support, 1.3045/50 is now insight, with the psychologically-important 1.30 handle being the subsequent support. It is also worth keeping an eye on the bullish trend line that has been in place since September 2022, coming in at just below the 1.29 level.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R