- GBP/USD rally could extend further with 1.25+ possible
- Stubborn inflation stoking risk of higher BoE Bank Rate
- Subdued yields & benign data an ongoing risk for USD
- UK's S&P Global PMIs, U.S. GDP & PCE data in focus
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The Pound to Dollar exchange rate has rallied close to six-month highs and could rise further in the days ahead with a break above technical resistance at 1.2504 and an approach of 1.26 possible if UK and U.S. economic data remains conducive to a continued rebound for riskier currencies.
Dollars were sold widely last week while Sterling notched up gains over all comparable currencies after a volley of economic figures made further increases in the Bank of England (BoE) Bank Rate more likely for the months ahead.
Sterling overcame technical resistances on the charts to climb for four days out of five in a rally that has squeezed one of the largest market short positions on the G10 field, although it could rise further if incoming economic data remains benign enough to keep the Dollar on its back foot.
"Late week price action in the pound has seen Cable move sideways within a steadily narrowing range—a bullish pennant consolidation," writes Shaun Osborne, chief FX strategist at Scotiabank, in a Friday market commentary.
"Bullish-leaning trend strength studies favour a topside break out and push on to retest key resistance at 1.2450/60 and beyond," he adds.
Above: Pound to Dollar rate shown at daily intervals with Fibonacci retracements of April 2022 and February 2022 declines indicating possible areas of technical resistance for Sterling. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.
Risk of a corrective setback could enter the picture if Tuesday's S&P Global PMI surveys suggest that December's bounce in activity was a false bottom for the UK manufacturing and services sectors, or if it transpires that consensus is too optimistic about this week's U.S. economic data.
"December's S&P Global/CIPS survey reported a rise in the composite PMI to 49.0, but both the manufacturing and services balances remained below the 50 'no change' mark," writes Andrew Goodwin, chief UK economist at Oxford Economics, in a Friday research briefing.
"Though falling energy futures prices might offer some support to sentiment, the bigger picture is one of household and corporate budgets continuing to be squeezed. As a result, we think next week's flash composite PMI will remain in contractionary territory," Goodwin adds.
Tuesday's PMI surveys are the highlight of the UK calendar but their significance is dwarfed by Thursday's release of U.S. GDP data for the final quarter and the latest reading of the Core Personal Consumption Expenditures (PCE) Price Index on Friday.
The consensus among economists suggests the U.S. economy expanded at an annualised pace of 2.6% in the final quarter, down from 3.2% in the third quarter but still a respectable number when going by pre-pandemic standards.
"The Q4 GDP report is expected to reveal solid US growth but concerns remain over a loss of growth momentum going forward," says Lee Hardman, a senior currency analyst at MUFG and a recent buyer of EUR/CHF.
Above: Financial model-derived estimates of probable trading ranges for selected currency pairs this week. Source Pound Sterling Live. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.
Any final quarter GDP number that is in line with expectations would have potentially positive implications for other economies around the world and so might be likely to weigh further on Dollar exchange rates in the week ahead, although much also depends on Friday's release of the Core PCE Price Index.
This particular measure of inflation is keenly monitored by the Federal Reserve (Fed) and would pose an upside risk to U.S. bond yields and the Dollar if Friday's release begs to differ with recent consumer price index figures, which have indicated that U.S. inflation is now over the hill and in retreat.
But it's possible the Dollar will also be burdened by side effects of the U.S. government debt limit having been reached last week, which forces the U.S. Treasury to draw down on its bank account at the Fed and leads in the process to an increase in the number of Dollars washing around the system.
"The debt ceiling will be a cloud over markets over the next few months, likely culminating in a storm of unknown intensity and duration," says Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics.
"The core PCE deflator probably rose 0.2%, pushing the three-month annualized rate down to just 2.6%, the lowest since December 2020 and just half the pace in the three months to October," Shepherdson adds.
Above: Pound to Dollar rate shown at weekly intervals with Fibonacci retracements of June 2021, April 2022 and February 2022 declines indicating possible areas of technical resistance for Sterling. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.