Pound to Dollar Week Ahead Forecast: Chart Headwinds and Data Risks in Focus

PoundSterlingLIVE -

• GBP/USD near late April high with risks & obstructions ahead
• Technical resistances could stymie at 1.26 & 1.2640 on charts
• UK data & lofty expectations of BoE risk prompting correction
• Stalling downtrend in U.S. CPI, Fed also both short-term risks

The Pound to Dollar exchange rate has reversed much of its May decline in early June trade but technical impediments might be likely to obstruct its recovery once around or above 1.26 while a minefield of economic data and related risk events could easily lead to a setback for Sterling in the days ahead.

Dollars were sold widely in a buoyant market for risky assets and a supportive environment for Sterling last week with the Pound rising against all in the G20 grouping except for the Australian Dollar, Norwegian Krone and South African Rand while climbing back above 1.25 against the greenback.

But Tuesday's release of employment figures in the UK and subsequent readout of U.S. inflation rates for last month could be game-changers for either of the respective currencies and with the Pound having risen furthest against the Dollar in recent months it could also be one of the most vulnerable to any rebound by the latter.

"We think softer wage and price data could emerge at any time and that market pricing of the Bank Rate (now at 5.50% for 24 January) is subject to a sharp downward revision," says Chris Turner, head of markets and regional head of research for UK & CEE at ING.

"Let's see whether tomorrow's data gives BoE Governor Andrew Bailey the chance to push back against those aggressive tightening expectations when he testifies to a House of Lords committee tomorrow afternoon," Turner writes in a Monday market commentary.

The UK wage number is likely to be of most interest to the market on Tuesday after more than a year in which pay has risen consistently by around 5% or 6%, leading the Bank of England (BoE) to fear inflation remaining higher for longer as a result, and prompting the markets to look for Bank Rate to be lifted as far as 5.5% this year in response.

"Overall, we see AWE Regular Pay settling at 7% (3m/YoY), with risks tilted to a slightly weaker 6.9% print. Private sector wage growth, we estimate, will have inched up to 7.3% (3m/YoY)," says Sanjay Raja, an economist at Deutsche Bank (ETR:DBKGn).

"Beyond the warns and unemployment data, we will be watching very closely any signs of redundancies following the first negative payroll print. Here, the redundancy rate will be important," Raja writes in a Friday research briefing.

A 10% increase in the national minimum wage is expected to have lifted pay growth back above 6% on Tuesday and the Pound might benefit briefly if the increase is any stronger but it's most likely to be more sensitive to any lower-than-expected reading, given how far expectations for Bank Rate have risen already in recent weeks.

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The biggest risk to recovery in the Pound-Dollar rate this week, however, stems from U.S. inflation figures out on Tuesday and the impact they could have on the Federal Reserve interest rate outlook after a nine-month downtrend in the core inflation rate appeared to stall when April figures were released last month.

"The bar is likely quite high for a beat/miss in the May CPI to alter this week's well-telegraphed policy decision," says Alvin Tan, Asia head of FX strategy at RBC Capital Markets.

"The impact (if any) will most likely be felt in Powell's tone at the press conference, but a CPI beat/miss could prompt a repricing into the decision and move the market's hawkish/dovish goalposts," Tan writes in Monday market commentary.

U.S. inflation had fallen steadily since June last year but the moderation has slowed in recent months and the core inflation rate, which central bankers see as the most reliable reflection of domestic inflation pressures, has remained stuck at 5.5% or higher since February this year.

This could mean there is a risk of U.S. inflation repeating the pattern seen in the UK and Norway where core inflation rates rose notably in the latest readings rather than continuing to fall, which would likely have hawkish implications for market pricing of the interest rate outlook and could act as a stimulus for the Dollar up ahead.

"The FX market is arguably primed for a hawkish June pause," says Stephen Gallo, a global FX strategist at BMO Capital Markets.

"With volatility in the FX space continuing to ebb, it will take an alarmingly hot CPI release, and a June Fed rate hike, to force a topside breakout in the USD," he adds.

The consensus among economists is that inflation likely fell from 4.9% to 4.1% last month with the core inflation rate, once volatile energy and food price changes are set aside, seen dipping from 5.5% to a new low of 5.3% barely more than a day ahead of Wednesday's Fed decision.

Wednesday's decision is widely expected to see the Fed Funds rate left unchanged for the first time in more than a year after Fed officials suggested through May that it could now be appropriate to observe how the economy responds to the already large 5% increase announced since March 2022.

"Last month’s USD rally has lost upward momentum at the start of June ahead of next week’s FOMC meeting," says Lee Hardman, a senior currency analyst at MUFG.

"The loss of upward momentum reflects in part expectations amongst market participants that the Fed will stick to plans to slow down the pace of hikes and leave rates on hold at next week’s policy meeting. We share that view and expect the USD to continue correcting lower in the week ahead," he adds in a Friday research briefing.

An original version of this article can be viewed at Pound Sterling Live