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GBP/USD rises as Starner supports Reeves

• Starmer backs Reeves for the future
• U-turn on welfare raises the chances of tax hikes
• GBP/USD uptrend remains intact

The pound is recovering after yesterday's sharp decline, rising towards 1.37 as markets react to Prime Minister Starmer's backing of Chancellor Rachel Reeves.

Starmer has come out today to defend Reeves amid speculation over her future as Chancellor, affirming that she will remain in her position for the foreseeable future. His comments have helped ease fears of a potential replacement who may be less strict in applying the fiscal rules and be more inclined towards higher borrowing.

Yesterday, the pound fell sharply and gilt yields shot higher amid concerns over Reeve’s future after an emotional moment in parliament. A U-turn on welfare cuts, combined with forecasts of lower growth, means that the government's fiscal headroom has all but evaporated. This could mean that tax hikes are more likely in the Autumn Budget. Tax hikes are considered deflationary.

Andrew Bailey of the Bank of England spoke earlier this week at the ECB forum, where he stated that the direction for interest rates remains downward. Separately, Alan Taylor, BoE policymaker, is calling for more aggressive rate cuts and warned of the increased chances of a hard landing for the UK economy.

UK PMI data is due shortly and is expected to confirm that business activity grew modestly in June at 50.7.

The USD trades unchanged versus its major peers but remains around a 3 1/2-year low. The dollar is firmer following news of a trade agreement between the US and Vietnam, which is fueling optimism over the potential for other deals ahead of the July 9 deadline.

Attention will turn to US nonfarm payrolls retro expected to show job creation of 110,000 and a rise in unemployment to 4.3%
 

GBP/USD forecast – technical analysis

The GBP/USD continues to trade within a rising channel that dates back to the start of the year. The price encountered resistance at 1.3750 and fell sharply, before finding support on the 50 SMA and the lower band of the rising channel at 1.3560.

Buyers will look to extend the bounce from the 50 SMA to 1.37 and a rise above 1.3750 creates a higher high.

Sellers will need to break below 1.3560 to break down the rising channel and create a lower low, opening the door to a deeper selloff towards 1.3450.

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EUR/USD is unchanged post PMIs & ahead of the US NFP report

• US NFP is expected to show 110k jobs added in June
• Unemployment is set to rise to 4.3% from 4.2%
• EUR/USD trades at 4-year highs

The EUR/USD remains unchanged after an upward revision to eurozone PMI data, as investors await the US nonfarm payroll figures.

The US dollar is hovering around a 3.5-year low ahead of the labor market data, which is expected to show that 110,000 jobs were added in June, and the unemployment rate ticked higher to 4.3%.

The data comes after yesterday's ADP payroll showed that private payrolls fell by 33,000, marking the first decline in two years as weakness seeps into the labour market. The data also comes as Federal Reserve Chair Jerome Powell said this week that a July rate cut is not off the table.

In light of these developments, the stakes have been raised for the non-farm payroll report. Weaker-than-expected data could raise expectations for a Fed rate cut, pulling the USD lower.

The market is currently pricing in a 25% chance for a cut in July versus 20% a day earlier.

Separately, the US dollar is finding some support from news that the US and Vietnam have agreed on a trade deal. Under this agreement, Vietnamese goods will be subject to a 20% tariff, and transshipment from third countries through Vietnam will incur a 40% levy, which is down from the initially applied 46% reciprocal tariff.

Progress in deals elsewhere has been slow, with Japan and the EU still working towards agreements as the July 9 deadline approaches.

Finally, the US big beautiful bill is moving closer towards being passed by the House of Representatives. The bill is expected to add $3.3 trillion to the already substantial national debt, exacerbating some fiscal concerns.

The euro is unchanged despite an upward revision to eurozone PMI figures. Eurozone service sector returned to modest growth in June, rising to 50.5 from 49.7 in May. The level 50 separates expansion from contraction. The composite PMI, which includes manufacturing and services, rose to 50.6 in June, up from 50.2, marking a three-month high but still only indicating modest growth.
 

EUR/USD forecast – technical analysis

EUR/USD has risen to a 4-year high. The pair is testing the upper bounds of the rising channel around 1.18. The RSI is deeply overbought, so there could be a period of consolidation.

Buyers will look to extend gains towards 1.19, a level last seen in August 2021, before bringing 1.20 into focus.

It would take a move below 1.16 to negate the near-term uptrend and a break below 1.1450 to create a lower low.

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