The GBP/USD pair continues to trade below the mid-1.2700s level, as the US Dollar (USD) remains strong and the market sentiment is mixed. The pair failed to capitalize on the overnight rebound from the 1.2700 mark, which was a one-and-a-half-week low, and retreated to the 1.2730-1.2740 region during the Asian session on Wednesday.
The USD Index (DXY), which tracks the Greenback against a basket of currencies, rose to its highest level since July 12 on Tuesday, as the US Treasury bond yields recovered from their recent lows. The DXY was supported by the upbeat US consumer confidence data, which showed a sharp increase in August, beating market expectations. The data also boosted the expectations for a hawkish stance from the Federal Reserve (Fed) in its upcoming policy meeting.
The GBP, on the other hand, was weighed down by the rising bets for more rate hikes by the Bank of England (BoE), which could dampen the economic recovery in the UK. The BoE Governor Andrew Bailey said on Tuesday that the central bank was closely monitoring the inflation situation and would act if needed. However, he also acknowledged that there were uncertainties about the outlook and that the BoE was not in a hurry to tighten its policy.
GBP/USD faces resistance near 1.2760 ahead of UK/US PMIs
The GBP/USD pair is likely to face some resistance near the 1.2760 level, which is the 50-day Simple Moving Average (SMA). A sustained break above this level could open the door for a further recovery towards the 1.2800 mark, which is a psychological barrier and also coincides with a three-week-old symmetrical triangle formation on the daily chart.
On the downside, the pair could find some support near the 1.2700 level, which is a round-figure mark and also a key Fibonacci retracement level of the recent rally from 1.2308 to 1.2680. A decisive break below this level could trigger a fresh bearish wave towards the 1.2600 level, which is another round-figure mark and also a previous swing low.
The pair’s next direction could also depend on the outcome of the preliminary readings of the August month Purchasing Managers Indexes (PMIs) for both the UK and the US, which are due later in the day. The PMIs are widely regarded as leading indicators of economic activity and could provide some clues about the relative strength of both economies.
The UK PMI is expected to show a slight moderation in both the manufacturing and services sectors, as the Delta variant of COVID-19 and supply chain disruptions weigh on the business confidence and output. The US PMI is also forecast to show a slight slowdown in both sectors, as the virus resurgence and labor shortages hamper the recovery momentum.
GBP/USD outlook remains bearish amid diverging monetary policies
The GBP/USD pair’s outlook remains bearish in the medium term, as the Fed and the BoE are expected to diverge in their monetary policies in the coming months. The Fed is widely anticipated to announce its tapering plans in September or November, and possibly start reducing its bond purchases by the end of this year or early next year. The Fed is also expected to hike its interest rates sooner than previously expected, as inflation remains elevated and growth remains robust.
The BoE, on the other hand, is likely to adopt a more cautious approach, as it faces multiple headwinds from the Brexit-related issues, such as trade frictions and labor shortages, as well as from the virus situation and its impact on consumer spending and business investment. The BoE is unlikely to hike its interest rates until late next year or early 2024, according to market pricing.
Therefore, the GBP/USD pair could face more downside pressure in the coming months, as the USD gains strength from its higher yield advantage and safe-haven appeal, while the GBP suffers from its lower growth prospects and inflation risks.
