GBP/USD forecast: Currency pair of the week - August 12, 2024

The cable is facing a key test this week with inflation and retail sales data to come from both sides of the pond. Market volatility has died down and the US dollar has fallen against the high-beta commodity dollars and risen against low-yielding currencies like the Japanese yen. If we don’t see any upside surprises in US inflation and activity data this week, this should cause the US dollar to fall further and support the GBP/USD forecast modestly.

Pound faces a key week

As well as the US, this is also an important week for UK data. We will see the latest UK employment and CPI inflation data, which could help set expectations for the Bank of England’s future policy trajectory after the UK central bank delivered its first cut in 4 years earlier this month, lowering the base rate by 25 basis points to 5% in a knife-edge decision that split the Monetary Policy Committee.

At the August 1 meeting, the MPC was quite cautious in its language and gave away very little about when we can expect to see further rate cuts. They argued that rates would need to “remain restrictive for sufficiently long”, because of uncertain inflation outlook. The BoE expects CPI inflation to rise to 2.75% in the second half of the year.

The market expects at least one more 25 bp cut before the year is out, but I believe this is far too conservative – especially with the Fed now seen cutting rates more aggressively than previously expected.

Indeed, the BoE are wary of the economic pain high interest rates are bringing to the UK economy with many households and businesses struggling with high debt repayments. They will be keen to cut rates further as soon as data allows them to do so. With the BoE having started the cutting cycle, upcoming inflation reports from the UK will be very important and could significantly impact the MPC’s rate decisions.

US dollar: All eyes on US inflation and retail data

Before the CPI data is released on Wednesday, we'll first see the PPI report on Tuesday. Following the recent disappointing jobs report and ISM manufacturing PMI, a surprisingly weak inflation report could significantly impact the US dollar, which has recently lost some of its yield advantage.

Economists predict +0.2% month-on-month increases for both headline and core CPI and PPI inflation figures. If CPI comes in higher than expected, it might challenge the anticipated acceleration of rate cuts that the markets have priced in. Conversely, if CPI is lower, the markets could gain more confidence in the roughly 100 basis points of rate cuts expected in 2024, potentially putting more downward pressure on the dollar.

In addition to inflation data, we'll also see some US activity data this week, including July retail sales on Thursday and earnings reports from retailers like Walmart and Home Depot. These will provide insights into the health of US consumers and provide clues on whether tight US monetary policy has started to affect consumption. Analysts are forecasting weak activity data, which could further weigh on the US dollar if their predictions hold true.

GBP/USD forecast: Key data highlights

Here’s a full list of the key data highlights relevant to the GBP/USD pair this week.

How to trade the GBP on the back of UK data this week?

Given my feeling that the market is pricing the BoE easing cycle conservatively, any downward surprises in UK data should boost the appeal of the EUR/GBP, JPY/GBP and FTSE 100. But with regards to the GBP/USD pair, a weakening US dollar will mask any data-driven drops in the pound. Thus, in my opinion, the GBP/USD pair is best to trade on the long side, especially if we see stronger-than-expected UK data this week, and/or weakness in US macro pointers.

GBP/USD forecast: Technical analysis

Source: TradingView.com

From a purely technical point of view, the 4-week run of bearish candles on the GBP/USD certainly points to a potential false breakout we saw in early July, when it broke its bearish trend line that had been in place since last summer. Still, the breakout has not been completely invalidated to turn the technical GBP/USD forecast bearish yet. However, that could change should we break July’s low of 1.2615 in the coming days. But with a weakening US dollar, I think there is a decent chance for a bounce at around the 1.2700 – 1.2750 support area this week. The upper side of the broken trend line and point of origin of the bullish breakout both converge around this zone. For as long as this area hold, I will maintain a modestly bullish technical view on the cable. 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R