GBP/USD analysis: Momentum fades for cable as focus turns to key US data

• GBP/USD analysis: UK PMIs then BoE next focus for pound traders
• Dollar turns positive on the week ahead of PMIs, GDP and PCE inflation
• GBP/USD technical analysis suggests bullish momentum has faded

The FX markets are set to come to life this week, after the Bank of Japan meeting caused a bit of volatility in JPY, which initially rose before falling back. For the wider markets, the focus will be on key US data coming up this week, as well as the ECB’s rate decision on Thursday. Today’s only US data release is the Richmond Fed Manufacturing index. This should give some insights about the state of the manufacturing sector ahead of tomorrow’s official global PMIs. The GBP/USD is among the major pairs worth watching closely this week.

GBP/USD analysis: UK PMIs then BoE next focus for pound trades

The GBP is an interesting currency to watch in the next couple of weeks, ahead of the Bank of England’s rate decision on 1st February. We have UK PMI data on Wednesday as the only major data release until the BoE meeting, plus a few other second-tier data releases which should not cause too much of volatility for the pound.

Last week’s mixed data from the UK has put the BoE in a difficult position. The data showed there is significant pressure on consumers, with average earnings coming in weaker than expected and CPI was hotter at 4% annual rate. The result of the squeeze on household incomes was evidenced by a 3.2% slump in monthly retail sales data.

The BoE will not want to push too hard against rate cut bets as it could damage confidence and weigh further on the economy. Yet, with inflation remaining sticky, it won’t be able to cut rates as soon as the markets want. So, there’s a risk the BoE could keep rates high for longer, causing more damage to an already-struggling economy. Any benefits the pound might receive from the prospects of higher for longer rates might be offset by worries about growth.

So, I can’t see how the pound will be able to climb significantly higher without first staging a correction, especially if US data continues to surprise positively.

Speaking of…

Dollar turns positive on the week ahead of PMIs, GDP and PCE inflation

The US dollar fell overnight as the Japanese yen and Chinese yuan rallied, with the latter being boosted by reports Chinese authorities are considering a package of measures to stabilize the slumping stock market. However, the yen couldn’t hold onto its BoJ-related gains as the USD/JPY recovered from below 147.00 to climb to 148.00 at the time of writing, after the BoJ stood pat on monetary policy and offered very little in the way of hints about a potential policy normalisation in the months ahead. As a result, the Dollar Index started to turn positive on the session and is now in the positive on the week too, as it tests key resistance and 200-day average at 103.50 ahead of key macro events later in the week.

Investors were expecting the Fed might cut interest rates sooner than it had planned. This year, those expectations have been pushed back thanks to strong data and hawkish Fed commentary, and so the greenback has risen alongside yields. A few weeks back, everyone thought a rate cut in March was a sure thing. Now, it's a toss-up, according to the CME's FedWatch tool.

As well as US PMI in mid-week, we have US GDP on Thursday and core PCE index on Friday, making it a busy second half of the week for the dollar. Recent robust reports on CPI, jobs, and retail sales have boosted the greenback, putting pressure on major FX pairs. If GDP data shows continued strength in the US economy, expectations for an imminent interest rate reduction will be pushed back further.

Anyway, here are the key data releases relevant to the GBP/USD pair for this week:

GBP/USD analysis: Technical levels to watch

Source: TradingView.com

The GBP/USD has lost its bullish momentum that was prevalent in the last two months of 2023. So far this year, the cable has traded in a very narrow range, holding in the negative territory for most part. The potential for a downside correction is growing as the top side is starting to look heavy.

Since peaking at just under 1.2830 in late December, the GBP/USD formed a couple of lower highs and another could be created this week, US data permitting.

There’s strong resistance between 1.2720 to 1.2800 area. The former ties in with the 61.8% Fibonacci retracement level against the July drop. A clean break above 1.2720-1.2800 area is now needed to re-establish the bullish trend.

Short-term support is seen around 1.2680, followed by around 1.2600 area. The 200-day average resides at 1.2550.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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