Image Source: Pexels
 

The just-released US PPI report was weaker than expected and we saw an immediate drop in the dollar in response. Earlier we had mixed-bag UK employment data helping to lift the pound across the board. The GBP to USD pair will be facing more tests later this week with CPI inflation and retail sales data to come from both sides of the pond. In recent days, market volatility has died down and the US dollar has fallen against the high-beta commodity dollars and risen against low-yielding currencies like the Japanese yen. If we don’t see any upside surprises in US inflation and activity data later this week, this should cause the US dollar to fall further and support the GBP/USD modestly.
 

US PPI comes in softer

PPI report was estimated at 0.2% month-on-month on both the headline and core fronts. However, it came in at 0.1% on the headline and flat on the core front. The year-over-year rate was 2.2% compared to 2.3% expected, down from a revised 2.7% the month before.

As a result of the weaker PPI data, we saw a bit of a weakness in US dollar across the board, which helped to keep the cable near the 1.28 handle.
 

Pound faces a key week

As well as the US, this is also an important week for UK data. After today’s release of mixed-bag UK jobs data showing a drop in the unemployment rate (to 4.2% from 4.4%) but a big rise in jobless claims (135K vs. 14.5K expected), the focus will be on the latest UK CPI and retail sales data later this week. These data releases could help set expectations for the Bank of England’s future policy trajectory after the UK central bank delivered its first cut in 4 years earlier this month, lowering the base rate by 25 basis points to 5% in a knife-edge decision that split the Monetary Policy Committee.

At the August 1 meeting, the MPC was quite cautious in its language and gave away very little about when we can expect to see further rate cuts. They argued that rates would need to “remain restrictive for sufficiently long”, because of uncertain inflation outlook. The BoE expects CPI inflation to rise to 2.75% in the second half of the year.

The market expects at least one more 25 bp cut before the year is out, but I believe this is far too conservative – especially with the Fed now seen cutting rates more aggressively than previously expected.

Indeed, the BoE are wary of the economic pain high interest rates are bringing to the UK economy with many households and businesses struggling with high debt repayments. They will be keen to cut rates further as soon as data allows them to do so. With the BoE having started the cutting cycle, upcoming inflation reports from the UK will be very important and could significantly impact the MPC’s rate decisions.
 

US dollar: All eyes on US inflation and retail data

Following the recent disappointing jobs report and ISM manufacturing PMI, as well as today’s weaker PPI report, a surprisingly weak CPI inflation report on Wednesday could significantly impact the US dollar, which has recently lost some of its yield advantage.

Economists predict +0.2% month-on-month increases for both headline and core CPI figures. If CPI comes in higher than expected, it might challenge the anticipated acceleration of rate cuts that the markets have priced in. Conversely, if CPI tracks the PPI lower, then the markets could gain more confidence in the roughly 100 basis points of rate cuts expected in 2024, potentially putting more downward pressure on the dollar.

In addition to inflation data, we'll also see some US activity data this week, including July retail sales on Thursday and earnings reports from retailers like Walmart and Home Depot. These will provide insights into the health of US consumers and provide clues on whether tight US monetary policy has started to affect consumption. Analysts are forecasting weak activity data, which could further weigh on the US dollar if their predictions hold true.
 

Key data highlights for GBP/USD pair

Here’s a full list of the key data highlights on the economic calendar relevant to the GBP/USD pair for the remainder of this week.

How to trade the GBP on the back of UK data this week?

Given my feeling that the market is pricing the BoE easing cycle conservatively, any downward surprises in UK CPI or retail sales data should boost the appeal of the EUR/GBP, JPY/GBP and FTSE 100. But with regards to the GBP/USD pair, a weakening US dollar will mask any data-driven drops in the pound. Thus, in my opinion, the GBP/USD pair is best to trade on the long side, especially if we see stronger-than-expected UK data this week, and/or weakness in US macro pointers. Today’s weaker PPI data from the US is certainly helping the cause.
 

GBP/USD technical analysis and trade ideas

(Click on image to enlarge)

In early July, the GBP/USD broke its bearish trend line that had been in place since last summer. While the cable’s run of 4-weekly bearish candles since may point to a potential false breakout scenario, the breakout has not been completely invalidated to turn the technical GBP/USD forecast bearish yet. However, that could change should we break July’s low of 1.2615 in the coming days. But with a weakening US dollar, I think there is a decent chance for a bounce at around the 1.2700 – 1.2750 support area this week. The upper side of the broken trend line and point of origin of the bullish breakout both converge around this zone. For as long as this area holds, I will maintain a modestly bullish technical view on the cable. The GBP/USD now needs to clear resistance in the range between 1.0800 to 1.08500 to potentially fuel a short-squeeze rally.

More By This Author: