GBP to USD Forecast: Bank of England’s Dilemma and US Economic Indicators

Highlights

• The GBP/USD gained 0.43% on Monday, ending the session at $1.21689.
• On Tuesday, bets on a dovish Bank of England policy hold could test the buyer appetite for the Pound.
• US economic indicators warrant consideration, with wages and consumer confidence in focus.

The Monday GBP/USD Overview

On Monday, the GBP/USD gained 0.43%. Reversing a 0.08% loss from Friday, the GBP/USD pair ended the session at $1.21689. The GBP to USD fell to a low of $1.20899 before rising to a Friday high of $1.21748.

Bank of England Speculation and the Middle East in Focus

Bank of England lending-related survey-based figures for September highlighted a deteriorating macroeconomic environment. Mortgage lending declined, with consumer credit also disappointing. Tighter credit controls and higher borrowing costs impacted consumer appetite to borrow.

The latest figures, alongside recent retail sales and service PMI numbers, paint a gloomy macroeconomic backdrop. Significantly, the numbers support a Bank of England hold on interest rates. A non-committal Bank of England, facing the prospects of a policy-driven recession, could fuel a GBP/USD sell-off.

On Tuesday, there are no UK economic indicators for investors to consider. The lack of economic indicators will leave the GBP/USD in the hands of market risk sentiment and bets on BoE policy goals.

US Employment Costs and Consumer Confidence in Focus

On Tuesday, US employment costs and consumer confidence will draw investor interest. A downward trend in employment costs and waning consumer confidence could signal a weaker demand outlook. Weaker demand would ease demand-driven inflationary pressures and ease pressures on the Fed to lift interest rates higher.

Economists forecast the Employment Cost Index to increase by 1% in Q3 (Q2: 1%). However, the wage growth component will likely have more impact on Fed rate hike bets.

Economists forecast Employment Cost – Wages to increase by 0.8% in Q3 (Q2: 1.0%). Importantly, economists expect the CB Consumer Confidence Index to fall from 103 to 100.

Short-Term Forecast

Near-term trends for the GBP/USD hinge on the Fed and Bank of England monetary policy decisions. A dovish BoE amidst a gloomy macroeconomic backdrop could send the GBP/USD to sub-$1.20.

GBP to USD Price Action

Daily Chart

The GBP/USD pair sat below the 50-day and 200-day EMAs, affirming bearish price signals.

A GBP/USD break below the $1.21216 support level would bring sub-$1.20 and the $1.18388 support level into view. Better-than-expected US wage growth and consumer sentiment numbers would pressure the GBP/USD.

However, a move through the 50-day EMA would give the bulls a run at the 200-day EMA and $1.24410 resistance level.

The 14-period daily RSI reading of 43.63 suggests a GBP/USD fall through the $1.21216 support level and a drop below $1.21 before entering oversold territory.

4-Hourly Chart

The GBP/USD sits below the 50-day and 200-day EMAs reaffirming bearish price signals.

A GBP/USD break above the 50-day EMA would support a move through the 200-day EMA to target $1.23.

However, failure to move through the 50-day EMA would support a fall through the $1.21216 support level.

With an RSI reading of 50.74 for the 14-period 4-hourly Chart, the GBP/USD could move to the 200-day EMA before entering overbought territory.