GBP/USD Daily Chart Analysis – 2024-08-16

The GBP/USD currency pair faced downward pressure on Thursday, testing the critical support level at 1.28, as U.S. retail sales and jobless claims data indicated that the U.S. economy might be more resilient than previously thought. This unexpected strength in economic indicators led to a rise in U.S. interest rates, subsequently diminishing the likelihood of the Federal Reserve implementing significant rate cuts in September or by the end of 2024. Prior to this, GBP/USD had been on an upward trajectory, buoyed by expectations of a dovish Fed stance following weaker U.S. payroll data, which had increased the probability of substantial rate cuts. Futures markets had been factoring in more than a 50% chance of a 50bps rate cut in September, along with additional cuts totaling 5-25bps by the close of 2024. However, the stronger-than-expected U.S. data released today has significantly reduced these odds, casting doubt on the feasibility of such an aggressive monetary policy move.

Technically, GBP/USD is showing signs of resilience despite the recent dip. The pair is currently finding support near the daily Ichimoku cloud top at 1.2782, with additional support around the Thursday low of 1.2798. Resistance is situated near the 1.2870 level, which marks the high area of the past three days, with further resistance at 1.2939, the high from July 24. The recent bounce from the 1.28 level suggests that Sterling still has the potential to rally, especially if upcoming UK economic data surprises to the upside. In particular, the July UK retail sales data, scheduled for release on Friday, could be a key driver for GBP/USD. Market expectations are set for a robust performance, with forecasts significantly higher than June’s figures. Should the data exceed expectations, it could propel GBP/USD back toward its recent trend highs, potentially pushing the pair towards the 1.30 level.

Fundamentally, the market’s recalibration of Fed rate expectations is crucial for the GBP/USD outlook. The earlier belief in a dramatic 50bps cut by the Fed may have been overly optimistic, especially with both headline and core inflation in the U.S. hovering around 3%. The Fed has been cautious in its communications, emphasizing a data-driven approach to monetary policy to prevent unnecessary market volatility. The reduction in the odds of a 50bps cut to 26%, as shown by the IRPR, reflects a more measured market sentiment. This shift suggests that the Fed is likely to opt for smaller, more gradual rate adjustments, if any, rather than a sharp policy shift, which could be interpreted as a loss of control over the economic situation.

In summary, while the GBP/USD pair has encountered short-term pressure due to stronger U.S. economic data, the technical and fundamental landscape remains favorable for a potential rebound. If the upcoming UK retail sales data supports a strong economic outlook, Sterling could regain momentum, aiming for resistance levels near 1.2870 and possibly higher towards the 1.30 threshold.