POUND STERLING ANALYSIS & TALKING POINTS
- Stacked week ahead for the UK – employment, inflation and fiscal statement.
- Headwinds for the GBP will likely re-emerge in due course leaving the pound vulnerable.
- Bear flag remains in play however, bull seek upside breakout.
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GBP/USD FUNDAMENTAL FORECAST: MIXED
Last week saw the pound benefit from a shift in global risk sentiment as the U.S. inflation report missed expectations resulting in a large USD sell-off. Despite UK GDP beating expectations, the overall inclination remained contractionary with lesser consumer spending likely to continue leaving future GDP forecasts trending downwards. Higher interest rates are taking its toll on the housing markets as well with early signs of falling house prices leaving construction activity limited.
The UK has several high impact releases scheduled this coming week. UK employment rates have been comparatively lagging next to its EU counterparts with factors such as early retirement and migration major contributors. While the unemployment rate remains depressed, the labor statistics delivered on Tuesday will be key.
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As with most nations around the world, inflation is the primary cause for concern and the UK is no exception. Wednesdays CPI read which has seen both core and headline figures at historic highs, will add to the Bank of England’s (BoE)’ data set as well as impact the fiscal statement the following day. The fiscal statement will be closely watched by GBP specialists with particular focus on the support measures for UK households.
GBP/USD ECONOMIC CALENDAR
Source: DailyFX Economic Calendar
From a U.S. perspective, the dollar may return some of its lost gains in my opinion after markets may have over exaggerated the CPI release last week. A few declines in inflation does not mean the inflationary pressure is certainly dropping and that the ‘Fed pivot’ is underway. It is important to remember that the Fed is still on an aggressive path albeit slightly reduced than a few weeks ago which should sustain the strong dollar particularly against relatively weaker economies and currencies like the UK and pound respectively. This fundamental reason leads me to believe GBP upside will be limited.
GBP/USD DAILY CHART
Chart prepared by Warren Venketas, IG
Price action on the daily cable chart has bulls testing the upper resistance bound of the emerging bear flag chart pattern (black). A confirmation candle close above this zone will invalidate the chart pattern and open up the 1.2000 psychological level.
Key resistance levels:
Key support levels:
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BULLISH IG CLIENT SENTIMENT
IG Client Sentiment Data (IGCS) shows retail traders are currently 55% LONG on GBP/USD (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, due to recent changes in long and short positioning we prefer a short-term upside bias.
Contact and followWarrenon Twitter:@WVenketas