GBP to USD Forecast: UK Pound’s Battle – Soaring Sales vs. Declining Service Sector

Highlights

• GBP to USD sees a 0.28% uptick on Monday, mitigating Friday’s 0.68% dip; closes at $1.26206.
• BRC Retail Sales Monitor outpaces predictions, marking a 4.3% YoY growth in August.
• Markets set their sights on Wednesday’s Treasury Select Committee Hearing for BoE’s stance.

The Monday Overview

On Monday, the GBP to USD gained 0.28%. Partially reversing a 0.68% fall from Friday, the GBP to USD ended the day at $1.26206. A mixed session saw the GBP/USD fall to a low of $1.25841 before rising to a high of $1.26425.

Services PMI Revisions to Guide the Pound

This morning, the BRC Retail Sales Monitor beat forecasts, increasing by 4.3% year-over-year in August. Economists forecast a more modest 2.2% increase.

The latest retail sales report may push the Bank of England to address inflation. Consumer spending increases inflationary pressures, and wage growth challenges the BoE. Rising wage growth can counteract the impact of interest rate hikes on consumer spending.

Later today, the UK services PMI also needs consideration. According to preliminary numbers, the UK services PMI dropped from 51.5 to 48.7. Considering the sector represents over 70% of the UK economy, this decline heightens recession concerns.

Despite the weaker services PMI, wage growth, consumption, and inflation will likely remain the focal points.

The markets will await Wednesday’s Treasury Select Committee Hearing to gauge the impact of recent figures on the BoE’s monetary policy.

No BoE MPC members are on the calendar to speak today, leaving commentary with the media to move the dial.

Factory Orders and Fed Commentary in Focus

US factory orders are in focus today. A significant drop could affect the demand for riskier assets. However, they’re unlikely to sway the Fed, as the US services sector, wage growth, consumption, and inflation are focal points.

Markets anticipate the Fed concluding its policy tightening. Any hawkish remarks could reignite expectations of one last rate hike before a halt.

Immediate Forecast: BoE Faces Tough Decisions

Revisions to the UK services PMI are impactful. A services sector contraction could hint at a UK recession. Despite economic concerns, the BoE might prioritize wage growth and inflation, but more rate hikes could strain the UK economy.

GBP to USD Price Action

Daily Chart

The GBP/USD sat below the trend line and the $1.26815 resistance level. Despite the hotter-than-expected retail sales report, UK recessionary jitters and BoE uncertainty leave the GBP/USD on the defensive.

Failure to move through the $1.26815 resistance level would bring the 200-day EMA and the $1.24410 support band into play. However, the UK services sector would need to deteriorate more than expected to fuel a sell-off.

An upward revision to preliminary numbers would give the bulls a run at the $1.26815 resistance level and 50-day EMA.

The 14-Daily RSI reading of 43.59 shows the GBP to USD has room to fall to sub-$1.25 before entering oversold territory.

4-Hourly Chart

The GBP/USD sits below the 200-day and 50-day EMAs and the $1.26815 resistance level. A move through the 50-day EMA would support a run at the $1.26815 resistance level and 200-day EMA. However, weaker-than-expected services PMI numbers would bring sub-$1.2550 into play.

Later in the session, US economic indicators and Fed chatter will also influence. We expect unexpected hawkish Fed comments to bring sub-$1.2550 into view.

The 46.30 14-4H RSI reading leaves the GBP/USD at risk of sub-$1.2550 before hitting oversold territory.