This week will be all about the economic data for the Great British Pound. As a reminder, at the most recent BOE meeting, Governor Bailey said that the central bank was concerned about hiking rates into a possible recession and that members were concerned about the hit household incomes would take due to rising inflation. The March GDP print was -0.1%. This week, markets will find out a bit more as to how well the economy is holding up. On Tuesday, the UK will release the Claimant Count Change. A decrease of 42,500 is expected vs -46,900 in March. Did the labor market continue to improve in April? On Wednesday, the UK will release inflation data. The headline print for April is expected to increase to 9.1% YoY vs 7% YoY in March! The core CPI print is expected to increase to 6.2% YoY in April vs 5.7% YoY in March. Boris Johnson has come under a bit of fire lately for the way he has handled inflation. So has the BOE. On Monday, Bailey said that the BOE is in a “very uncomfortable, difficult place.” Will this week’s report prove the BOE correct that they should be worried about the effect of inflation on household incomes? Markets will get a better perspective of that on Friday when the UK releases April Retail Sales. Is the UK consumer able to keep the economy afloat? The headline print is expected to be -0.2% MoM vs March’s reading of -1.4% MoM. Ex-Fuel, April’s reading is expected to be -0.2% MoM vs -1.1% MoM in March. After this week, the BOE and the markets will have a much better picture of the economy in the UK!
The US economy may be having problems of its own. Recall that Q1 2022 GDP was -1.4%. The preliminary look at the Michigan Consumer Sentiment Index for May was 59.1, the lowest reading since August 2011. Is the US heading towards a recession? If so, what does that mean for interest rates? The NY Empire State Manufacturing Index was the first of the regional manufacturing indexes to report for May. The print was -11.6 vs an expectation on 17 and 24.6 in April. This was one of the largest drops on record. On Thursday, the Philadelphia Fed reports its manufacturing index for May. Will the results be just as bad? “Never bet against the American consumer” is a phrase often thrown around Wall Street. But can the consumer save the US from a recession? On Tuesday, the US will report Retail Sales data for April. Expectations are for a print of 0.8% vs 0.5% in April. The Ex-Autos reading is expected to be 0.3% vs 1.1% in April. The US will also release Industrial Production and Manufacturing Production on Tuesday. Fed members have been hinting at the high possibility of a 50bps rate hike in both June and July. However, if the data continues to come out worse than expected. Will they begin to change their tune? Markets may find out a bit more when Powell speaks on Tuesday regarding inflation.
GBP/USD has come quite a distance since making post-pandemic highs near 1.4250 in the Spring of 2021. The pair began moving lower through the rest of 2021 and the 1st quarter 2022. However, when price broached the 1.3000, GBP/USD fell like a knife through butter. During the last week in April, the pair fell from 1.3090 down to 1.2411 as the RSI moved into oversold territory. GBP/USD consolidated over the next week, only to pick up steam again on the downside as the US Dollar continued to move higher on US inflation fears. However, notice the RSI is diverging with price in oversold territory, an indication that price may be ready for a near-term bounce.
Source: Tradingview, Stone X
On a 240-minute timeframe, GBP/USD is forming a descending wedge. Expectations are that the pair will break out to the upside of the wedge as price nears the apex. The target for the breakout of a wedge is a full 100% retracement of the wedge. Also notice that the RSI is diverging from price on the shorter timeframe. First horizontal resistance is at 1.2540, then the 38.2% Fibonacci retracement from the highs of April 21st to the low of May 13th, near 1.2512. Above there, price can move to the 50% retracement level from the same timeframe (as well as the descending wedge target) near 1.2623. However, if price continues to the downside, the first support level is the lows of May 13th at 1.2556. Below there, price can fall to the lows of May 2020 at 1.2075, then down to the pandemic lows of 1.1410! (see daily)
Source: Tradingview, Stone X
With economic data releases from both the UK and the US this week, GBP/USD has the potential to be volatile. In addition, there will be speeches from BOE Governor Bailey and Fed Chairman Powell. Is it time for the pair to bounce? Perhaps, if it is able to trade above the descending wedge of the 240-minute timeframe!
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