GBP Weekly Outlook: BoE & Fed to dictate pound Sentiment

Pound sterling analysis and talking points

• More uncertainty around the BoE on Fed guidance (Jerome Powell) makes US dollar conditions more interesting.
• US economic data including NFP and ISM to further clarify the picture.
• Will the rising wedge strike again?

GBP/USD Basic Forecast: BEARISH

The British pound is bracing itself for an overlapping week that includes both the Bank of England (BoE) and Federal Reserve interest rate decisions (see economic calendar below). The BoE hinted at another 50bps hike, confirmed by money market prices, as shown in the table below. While this is mostly sold in GBP crosses, the split in volume seen at the February meeting could provide some price volatility. Last meeting’s majority vote was 50bps but given new economic data, there could be further votes split between 50bps and 25bps with the BoE’s Tenreyro and Dhingra likely to remain unchanged – which could lead to a negative reaction to the pound. On the contrary, softer energy prices may be limiting recession fears, but with rates expected to end at 4.5% in 2023 (agreed by Governor Bailey), the BoE may remain on this path due to institutional integrity.

Bank of England interest rate opportunities

Source: Refinitiv

Against the USD, markets are looking at the Fed’s guidance of a 5% terminal rate for 2023 as inflation moderates. On the other hand, the labor market is extremely strong and will be closely watched next week through the Non-Farm Payroll (NFP) report. Additionally, the ISM services data is key to considering that America is primarily a service-driven economy (wage statistics are also closely monitored).

Federal interest rate opportunities

Source: Refinitiv

GBP/USD Economic Calendar

Source: DailyFX Economic Calendar

Technical analysis

GBP/USD daily chart

Chart prepared Warren VenketasI.G

Daily GBP/USD price action is now hovering at December 2022 highs with no success from the bulls so far to push confidently into this defensive zone. Next week’s fundamental drivers could certainly provide the catalyst depending on the results of the meeting. Bears are closely watching the developing wedge formation (black) for a second December breakout in textbook fashion. When the relative strength index (RSI) level approaches overbought territory, a leg down is unlikely. If we look close to the daily candle, the wedge formation may be invalid. 1.2500 Psychological container.

Key Resistance Levels:

Key Support Levels:

• Wedge support
• 1.2154/200-day SMA
• 1.2000

BEARISH IG customer sentiment

The IG Consumer Sentiment Index (IGCS) shows that retailers are currently Short In GBP/USD, with 57% Traders currently holding short positions (as of this writing). At DailyFX we normally take a contrarian view of public sentiment, but we have recently come across a short-term downside bias due to changes in long and short positions.

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