Extend the recovery if the US CPI falls further
- GBP/USD under pressure near key supports above 1.24
- Facing resistance on recovery above 1.2629 near 1.2660
- Dollar trend key for GBP/USD ahead of May US CPI data
- New Signs of High Inflation Could Help GBP/USD Rebound
- But the persistence of the Fed may limit the upside potential of GBP/USD
Image ©Adobe Images
The pound to dollar rate enters the new week with its back against the ropes near the 1.25 handle and may struggle to hold back a buoyant greenback ahead of Friday’s all-important US inflation numbers for May, which could be the key to whether the pound is able to avoid a retest of last month’s lows.
The pound had tried to rally after an earlier dip below the 1.25 level during weak holiday trading late last week, but was held back by a rebound in the dollar after payrolls figures and the PMI index in the United States underlined the continuing upside risks to the policy outlook of the Federal Reserve (Fed).
While jobs data and industry surveys clearly indicated that labor market dynamics and other key U.S. economic sectors are slowing, they also revealed that risks to the outlook for US inflation United States are still on the rise.
This in turn suggests that there is still room for the Fed to raise US interest rate expectations in the coming months, which would provide further headwinds for the pound/dollar exchange rate, or even an outright burden on the pound.
“A failure to recover the 1.26 handle could give the GBP a more bearish feeling to end the week after breaking its uptrend from the mid-May lows on Tuesday,” said strategist Juan Manuel Herrera. Scotiabank.
Above: Rate of the pound against the dollar at daily intervals with Fibonacci retracements of the mid-May rally indicating possible areas of short-term technical support for the pound and the gap or gap between UK and US 02-year government bond yields. Click on the image for a more detailed inspection.
“Support is the 1.25 middle area followed by 1.2525 and the big numbers area; Wednesday’s low at 1.2459 follows. Resistance after the 1.26 area is 1.2630 and from the middle of 1.26,” Herrera and colleagues said in a Friday note.
Wage growth detailed in Friday’s U.S. payrolls report eased slightly, but both PMI surveys suggest that demand for workers continues to rise alongside their demands for wages and other prices , which was a headwind for the pound-dollar rate.
This may be because these are all things that could fuel inflation further and therefore potentially lead to the Fed being more inclined to continue raising interest rates in larger increments than usual throughout. of the year.
“Although we expect the US economy to weaken, the stronger than expected US jobs report for May will likely reduce concerns about a slowdown in consumer spending in the near term,” said Zach Pandl. , co-head of global currency strategy at Goldman Sachs.
Source: Institute for Supply Production (ISM). Click on the image for a closer inspection.
“Jobs data and the rebound in Treasury yields may continue to support the broader dollar in the near term,” Pandl and colleagues said Friday.
This is why Friday’s inflation data for May is likely to be a key determinant of the outlook for the pound/dollar rate in the near term and particularly in the context of whether or not a further slowdown in the monthly pace of inflation.
“We expect the headline index to gain 0.8% from 0.3% at the start of the second quarter. Core CPI is expected to be almost as strong in May as it is. was in April (forecast of 0.5% after 0.6%). while the benchmark would slip 0.3 points to 5.9%,” said Kevin Cummins, chief U.S. economist at Natwest Markets.
The consensus suggests that financial markets are likely to expect the monthly pace of inflation to rise from 0.3% to 0.7% last month, but the core inflation rate to rise from 0, 6% to 0.5%, and whether that might be important in shaping the Federal Reserve’s policy outlook.
Above: The US Dollar Index displayed at weekly intervals with Fibonacci retracements of January and June 2021 recoveries indicating possible areas of near to medium-term technical support for the US Dollar and some US bond yields US state. Click on the image for a more detailed inspection.
Indeed, several influential bank officials appeared to indicate last week that they still risk becoming more “hawkish” with their interest rate outlook in the months ahead if U.S. inflation rates do not continue to trend lower. timid decline observed only recently. month.
“On inflation, I will look to see a consistent series of decelerating monthly impressions on core inflation before feeling more confident that we arrive at the kind of inflation path that will bring us back to our two inflation targets. As far as our tools go, they’re very good at cooling aggregate demand,” Fed Board Vice Chairman Lael Brainard said Thursday.
Friday’s US inflation data is the culmination of what is a quiet week in the UK economic calendar, leaving much to be determined for the pound-dollar rate by developments on the dollar side of the equation ahead of the British pay data next week and the month of June. 16 Bank of England (BoE) decision.
“With consumer activity under pressure due to the soaring cost of living, the recent fiscal easing is only limiting rather than improving the impact of the contraction in real household disposable income, we remain biased in favor of the We would look to sell GBP/USD down to 1.2590 with only a move above 1.27 negating that,” said Jeremy Stretch, Head of FX Strategy at CIBC Capital Markets .
Above: Rate of the pound against the dollar displayed at weekly intervals with Fibonacci retracements of various falls from 2020 indicating possible areas of technical resistance in the short and medium term for the pound. Click on the image for a more detailed inspection.