The GBP/USD pair regains some positive traction on the last day of the week and reverses a part of the previous day’s slide to sub-1.2400 levels, or its lowest level since June 7. Spot prices stick to modest intraday gains through the early European session and draw support from a modest US Dollar (USD) weakness. The People’s Bank of China (PBoC) lowered the Reserve Ratio Requirements for local lenders by 25 bps. This is the second such move this year and is expected to release more liquidity, which should potentially shore up growth in the world’s second-largest economy. Adding to this, China reported better-than-expected Industrial Production and Retail Sales figures for August. The combination of factors boosts investors’ confidence and prompts some profit-taking around the safe-haven Greenback.
The USD corrective decline from a more than six-month top touched on Thursday, however, is more likely to remain limited in the wake of growing acceptance that the Federal Reserve (Fed) will stick to its hawkish stance. The US central bank is widely expected to maintain the status quo in September, though the incoming upbeat US macro data keeps the door open for one more 25 bps lift-off by the end of this year. The US Census Bureau reported on Thursday that Retail Sales increased by 0.6% in August as compared to the 0.2% rise anticipated and the previous month’s downwardly revised reading of 0.5%, a sign that consumer spending remains steady despite rising interest rates.
Moreover, the US Initial Jobless Claims rose less than expected, to 220K during the second week of September from the 217K previous.
Simultaneously, the US Bureau of Labor Statistics published the US Producer Price Index (PPI), which accelerated to 0.7% in August and the annual rate climbed to 1.6%, outperforming expectations for a reading of 1.2% and 0.8% in July. This comes on top of the US CPI report released on Wednesday and points to a still-sticky inflation, which, in turn, supports prospects for further policy tightening by the Fed. The hawkish outlook favours the USD bulls, which, along with diminishing odds for more aggressive rate hikes by the Bank of England (BoE), should keep a lid on any further gains for the GBP/USD pair. In fact, BoE Governor Andrew Bailey told lawmakers last week that the central bank is now “much nearer” to ending its run of interest rate increases.
Moreover, data released on Wednesday showed that Britain’s economy shrank at the quickest pace in seven months in July, by 0.5%, and revived recession fears. This, along with signs that the UK labour market is cooling, puts pressure on the BoE to pause its rate-hiking cycle. This, in turn, favours the GBP/USD bears and suggests that any further move up might still be seen as a selling opportunity. Traders now look forward to the BoE survey on Consumer Inflation Expectations for some impetus. Later during the early North American session, the US economic docket – featuring the Empire State Manufacturing Index and Prelim Michigan Consumer Sentiment Index – will drive the USD demand and produce short-term trading opportunities. Nevertheless, spot prices remain on track to register losses for the second successive week.
Technical Outlook
From a technical perspective, the overnight breakdown and close below the very important 200-day Simple Moving Average (SMA), for the first time since March, could be seen as a fresh trigger for bearish traders. Moreover, oscillators on the daily chart are holding deep in the negative territory and are still far from being in the oversold territory.
This, in turn, suggests that the path of least resistance for the GBP/USD pair is to the downside. That said, the emergence of some buying on Friday makes it prudent to wait for acceptance below the 1.2400 mark before positioning for further losses. Spot prices could then accelerate the fall towards the May monthly swing low, around the 1.2310-1.2300 area, before dropping to test the next relevant support near the 1.2280-1.2275 zone.
On the flip side, any subsequent move-up is likely to confront some resistance near the mid-1.2400s, which if cleared might trigger a short-covering rally and lift the GBP/USD pair towards the 1.2500 psychological mark. The recovery momentum could get extended, though runs the risk of fizzling out rather quickly near the weekly high, around the 1.2545-1.2550 region. The latter should act as a pivotal point, above which spot prices could climb to the 1.2600 mark en route to the 100-day SMA, currently near mid-1.2600s. Some follow-through buying will suggest that a two-month-old downtrend, from the 1.3140 area, or the highest level since April 2022, has run its course and should pave the way for some meaningful near-term appreciating move.
