GBP to USD Forecast: Hawkish BoE Comments Provide Brief Respite for Pound

Highlights

• GBP to USD slid 1.22% over the week but finds brief relief from hawkish BoE Deputy Governor comments.
• BoE’s Broadbent did not signal further rate hikes, leaving GBP/USD hinging on UK employment and inflation.
• A hotter-than-expected US economy leaves Fed hawks to pull the strings, but the dollar risks a sharp reversal.

The Friday Overview

On Friday, the GBP to USD fell by 0.18%. Following a 0.97% slide on Thursday, the GBP to USD ended the week down 1.22% to $1.25766. A choppy session saw the GBP/USD rise to a high of $1.26544 before sliding to a low of $1.25479.

GBP/USD Finds Brief Relief on Hawkish BoE Comments

This morning, investors responded to Bank of England Deputy Governor Ben Broadbent comments from the weekend.

In discussing the dynamics of wage growth and domestic prices, trade, the war in Ukraine, and energy prices, the Deputy Governor said,

“Together with a tight labor market, the resulting squeeze on income is likely to have contributed to the sharp rise in domestic inflation and the consequent tightening of monetary policy.”

Broadbent concluded,

“Over time, the more recent decline in import prices will alleviate some of this pressure. But it’s unlikely that these ‘second-round’ effects will unwind as rapidly as they emerged. As such, monetary policy may well have to remain in restrictive territory for some time yet.”

While the Deputy Governor talked about restrictive monetary policy, he did not signal further rate hikes to tame wage growth and inflation. The near-term direction for the GBP/USD will hinge on UK employment and inflation figures, the focal points for the BoE.

There are no UK economic indicators for investors to consider today. However, investors should monitor the news wires for Bank of England commentary.

Fed Chair Powell Leaves Policy Divergence in Favor of the Dollar

Fed Chair Powell warned of further interest rate hikes on Friday, in contrast to comments from the Deputy Governor of the BoE.

With the US economy on a more solid footing, the Fed has more wriggle room to curb consumption. US economic indicators on Thursday and Friday will likely dictate the September Fed interest rate decision.

A pickup in wage growth and personal spending, with sticky inflation and a steady US unemployment rate, would send hawkish signals. Wage growth remains a bugbear for the Fed. A hotter-than-expected US economy leaves the Fed hawks to pull the strings.

However, the dollar is at risk of a sharp reversal should US inflation and wage growth soften.

This afternoon, we expect the Dallas Fed Manufacturing Index numbers to have a limited impact on the GBP/USD pair. The manufacturing sector accounts for less than 30% of the US economy, limiting the impact of manufacturing sector numbers on the Fed.

While investors will likely brush aside the manufacturing numbers, FOMC member commentary will influence.

GBP to USD Price Action

Daily Chart

The Daily Chart showed the GBP to USD below the $1.2785 – $1.2862 resistance band. Looking at the EMAs, the GBP to USD also hovered below the 50-day EMA while holding above the 200-day EMA, sending bearish near-term but bullish longer-term price signals.

Looking at the 14-Daily RSI, 37.00 reflects a bearish sentiment. The RSI and 50-day EMA signal a fall through the upper level of the $1.2520 – $1.2440 support band to bring the 200-day EMA into play. However, a return to $1.2650 would give the bulls a run at the 50-day EMA.

4-Hourly Chart

Looking at the 4-Hourly Chart, the GBP to USD hovers above the $1.2520 – $1.2440 support band. After the weekly loss, the GBP to USD remains below the 50-day and 200-day EMAs, sending bearish near and longer-term price signals.

The 14-4H RSI reading of 40.29 reflects a bearish sentiment, with selling pressure outweighing buying pressure. Notably, the RSI and EMAs signal a fall through the upper level of the $1.2520 – $1.2440 support band. However, a GBP/USD return to $1.2650 would bring the 50-day EMA into play.