GBP to USD Forecast: BoE Rate Hike Uncertainty Leaves Outlook in Flux

Highlights

• GBP/USD slid by 0.73% on Tuesday, ending the session at $1.21591.
• UK private sector PMI numbers for October eased bets on a BoE interest rate hike.
• Sentiment toward the BoE and the UK economic outlook will continue to influence trends before US housing sector numbers.

On Tuesday, the GBP/USD slid by 0.73%. Reversing a 0.70% rally from Monday, the GBP/USD pair ended the session at $1.21591. The GBP to USD pair rose to a Tuesday session high of $1.22886 before falling to a low of $1.21531.

UK Economic Indicators Signal BoE Hold and Recession

UK private sector PMIs diminished hopes of a GBP/USD revival on Tuesday. Sentiment across the all-important services sector waned, with the sector contracting for the third consecutive month.

The UK services sector contributes over 75% to the UK economy. A third consecutive monthly contraction raised the prospects of a UK economic recession. Coupled with the larger-than-expected slump in retail sales, the Bank of England may have sufficient data points to leave interest rates unchanged.

BoE Governor Andrew Bailey and Chief Economist Huw Pill recently described monetary policy decisions as finely balanced. A weakening economy, high wage growth, and persistent inflation offer no policy certainties.

Lingering bets on a BoE rate hike may provide price support. However, the deteriorating macroeconomic environment will be a headwind.

There are no UK economic indicators for investors to consider. The lack of stats leaves BoE policy bets and risk appetite to guide the GBP/USD pair.

US Housing Sector in Focus Pre-Inflation

Later today, US new home sales will garner investor interest. Elevated mortgage rates have impacted disposable income, increasing the threat of a weak demand outlook.

The US construction sector contributes less than 10% to the US economy. However, US private consumption contributes over 65% to the economy. A weaker demand outlook would ease demand-driven inflationary pressure and allow the Fed to take a less hawkish Fed rate path.

The numbers warrant consideration. However, US Core PCE Price Index and personal spending figures on Friday will have more influence on the Fed.

Short-Term Forecast

GBP/USD near-term trends hinge on US inflation and personal spending numbers, out on Friday. Hotter-than-expected Core PCE Price Index figures may reignite bets on a December Fed rate hike. More hawkish bets on Fed rate hikes would tilt monetary policy divergence in favor of the US dollar.

GBP to USD Price Action

Daily Chart

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

A GBP/USD break below the $1.21216 support level would support a move toward $1.20000. Market risk sentiment and Bank of England forward guidance will influence buyer appetite for the Pound

However, a pickup in market risk sentiment could drive demand for the Pound. A return to $1.22500 would bring the 50-day EMA into view.

The 14-period daily RSI reading of 44.16 indicates a GBP/USD fall through the $1.21216 to sub-$1.21 before entering oversold territory.

4-Hourly Chart

The GBP/USD hovers 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 toward the 200-day EMA.

However, a fall through the $1.21216 support level would bring sub-$1.20000 into play.

With an RSI reading of 48.03 for the 14-period 4-hourly Chart, the GBP/USD may break below the $1.21216 support level before entering oversold territory.