Sterling loses ground amid strong US dollar rebound

• Sterling extended its correction from 30-month highs against the US dollar.
• Will US inflation data revive GBP/USD buyers next week?
• Technically, the path of least resistance appears to be down for the pound.

The British pound (GBP) ended the week in the red against the US dollar (USD) as GBP/USD extended the correction from 30-month highs to below 1.3100.

Sterling slips in US dollar resurgence

GBP/USD failed to hold higher and returned to negative territory, shedding almost 300 pips over the past week. The pair faced a double whammy with resurgent demand for the US dollar on the one hand, while on the other hand the pound was thrown under the bus on expectations of accommodative Bank of England (BoE) policy and aversion to risk. market environment.

The recent spate of strong US economic data, including JOLTS Job Openings, ADP Employment Change and ISM Services PMI has poured cold water on bets that the Federal Reserve (Fed) will opt for a 50 basis point (bps) interest rate cut. in November, fueling a sustained rally in the US dollar against its main rivals.

Data on Tuesday showed that US job openings rebounded to a three-month high in August, reaching 8.04 million after falling to 7.71 million in July. Automatic Data Processing (ADP) reported on Wednesday that US private sector employment rose by 143,000 jobs for September, accelerating from an upwardly revised 103,000 in August and better than the estimate of 120,000.

Meanwhile, the US ISM services PMI jumped from 51.5 to 54.9 in September, above the forecast of 51.7, while marking the highest reading since February 2023. Markets now have a chance of approx. 34% for the Fed to cut interest rates at its next meeting. , compared with nearly 60% last week, CME Group’s FedWatch Tool shows.

The greenback also drew refuge demand amid rising risks that the Israel-Iran conflict could turn into a wider regional war in the Middle East. Iran launched missile attacks on Israel in retaliation for last week’s killing of leaders of the Tehran-backed Hezbollah militant group. Israel responded by striking an apartment in central Beirut, killing nine people. The Lebanese army returned Israeli fire for the first time in nearly a year of fighting between Israel and Hezbollah.

On the sterling side of the equation, prevailing risk aversion continued to weigh on the high-beta currency. However, dovish comments from BoE Governor Andrew Bailey in an interview with The Guardian on Thursday exacerbated the pain, sending the GBP/USD pair to a three-week low of 1.3092.

Bailey said the BoE could become a bit “more activist” on rate cuts if there is still good news on inflation. Following his remarks, UK money markets suggested bank rate cuts of around 42bps over the rest of 2024, up from around 36bps on Wednesday.

The pair licked its wounds on Friday amid lingering Middle East concerns and market jitters heading into the US NFP showdown. However, GBP/USD moved south in the second half of the day and fell below 1.3100 as the USD capitalized on upbeat US data. US non-farm payrolls (NFP) rose by 254,000 in September, beating the market estimate of 140,000 by a wide margin. Moreover, August’s NFP increase of 142,000 was revised up to 159,000.

Watch out for US consumer inflation data

The first part of next week is a quiet one until the middle of the week, when the minutes of the Fed’s September meeting will be released on Wednesday. The absence of high-impact economic communications from the UK and the US will focus on a series of Fed policymakers’ speeches on Monday and Tuesday.

On Thursday, the highly influential US Consumer Price Index (CPI) data will be reported alongside weekly jobless claims. Following the release of the data, New York Fed President John Williams is scheduled to participate in a moderated discussion on the economic outlook and monetary policy at Binghamton University.

On Friday they will present monthly data on UK Gross Domestic Product (GDP) and industrial production. The US calendar will see the release of the producer price index (PPI) and preliminary data on Michigan consumer sentiment and inflation expectations on the same day.

In addition, geopolitical developments in the Middle East will continue to remain on traders’ radars throughout the week as tensions between Israel and Iran escalate.

GBP/USD: Technical Outlook

As seen on the daily chart, the GBP/USD pair has breached critical support levels in its corrective decline from the over two and a half year highs of 1.3434 reached last week.

Thursday’s close below the 21-day simple moving average (SMA) at 1.3230, followed by a sustained break of downtrend line resistance turned support at 1.3165, empowered sellers further.

Looking ahead, risks look tilted to the downside for GBP/USD as the 14-day Relative Strength Index (RSI) remains well below the 50 level, currently near 44.

Immediate support for buyers is lined up at the 50-day SMA at 1.3076. A weekly close below this would initiate a new downtrend towards the psychological 1.3000 level.

The next bearish target is seen at the 100-day SMA at 1.2926. The last line of defense for buyers is located at 1.2779, the key 200-day SMA.

On the contrary, any attempt at recovery will likely meet the initial area of ​​contention around 1.3160, the previous support of the downtrend line has now turned into resistance.

Acceptance above the 21-day SMA at 1.3230 is needed to cancel the short-term bearish trend.

Sterling will then target the 1.3300 level on the way to a recovery, above which the 30-month high of 1.3434 will be back on buyers’ radars.