Pound to Dollar Week Ahead: Targeting 1.2440

• GBPUSD outlook improves notably
• Aided by big advance Friday
• 200 day moving average next target
• Watch UK GDP, Bailey speech
• Powell speeches will matter for USD

Image © Adobe Images

The Pound to Dollar exchange rate's technical setup has improved notably following Friday's surge but any further upside progress will be tested by this week's UK GDP data release and speeches from the Bank of England's Andrew Bailey and the U.S. Federal Reserve's Jerome Powell.

Pound-Dollar rose by over a per cent on Friday following the release of softer-than-expected U.S. labour market figures that further lowered the odds of another U.S. interest rate hike and raised the prospects of rate cuts in 2024.

The data outturn weighed on U.S. yields, boosting 'risk on' assets and putting pressure on the Dollar, which lost ground against all its G10 peers.

Technical analysts say the outlook for GBPUSD has now improved and are now looking for a test of the key 200-day moving average to signal a more decisive turn in trend that would favour further gains by Sterling.

"GBP/USD recently achieved the target for the H&S confirmed earlier and formed an interim low at 1.2035. The decline has paused, resulting in the formation of a small base," says Kenneth Broux, a strategist at Société Genérale.

Above: GBPUSD at daily intervals. Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.

"It would be interesting to see if the pair can gradually re-establish above the 200- DMA near 1.2440; this break would be essential to affirm an extended bounce. Inability to cross would mean persistence in down move. Next potential supports are located at 1.1980 and March low of 1.1800/1.1745," says Broux.

The most important data release of the coming week will be that of UK GDP for the third quarter at 07:00 GMT on Friday.

This will be a crucial piece of information for currency markets - that are fixated on growth differentials - to pass judgment on the Pound.

The UK economy grew 0.2% quarter-on-quarter in the second quarter and 0.6% year-on-year. All signs point to a slowdown from these levels.

But ahead of the GDP release, we have the two heavy hitters at the Bank of England in the form of Governor Andrew Bailey and Chief Economist Huw Pill to look forward to.

Pill speaks on Monday at 17:00 and the market will be looking for him to comment on last week's Bank of England policy decision and guidance update. Pill's most recent speech saw him use the Table Mountain analogy to describe the outlook for UK interest rates, signalling they would remain at 5.25% for an extended period.

"Shifting expectations on interest rates might have been expected to drive sterling lower, but the BoE’s shift to its 'Table Mountain' strategy – a period of levelling off before reducing rates – now appears to be in the price," says McNamara.

On Wednesday at 09:30, Bailey will speak at the Central Bank of Ireland's 'Financial System Conference: achieving good outcomes in an uncertain world'. Bailey will provide the keynote address and follow it up with a 'fireside chat' alongside other panellists.

Therefore, he will likely touch on the UK economy and interest rates at some point in his appearance in Dublin.

Following Thursday's interest rate decision, Bailey said in a media interview he would have to "lean against" market developments following the Bank of England's decision made earlier in the day.

Despite the Bank stating rates would remain at current levels for an extended period, rate cut expectations increased, resulting in the first rate cut being fully priced for September 2024.

This development explains why the Pound struggled to advance in the wake of the Bank of England's decision. However, Bailey's subsequent intervention and pushback were explicit and appeared to stabilise Sterling.

We expect both Pill and Bailey to hammer home this message in their upcoming speeches.

If the market buys it, the Pound can remain supported. If not, then further downside pressures are likely.

Above: File image of Jerome Powell, image courtesy of the Federal Reserve.

The data pulse out of the United States turns lower over the coming days which means greater emphasis will be placed on the guidance offered by members of the Federal Reserve.

On our radar is FOMC member Waller, due to speak at 15:00 GMT on Tuesday, followed by Williams at 17:00.

But it will be Fed Chair Powell who will be of more interest with speeches on Wednesday at 14:15 and again on Thursday at 19:00.

Some speeches will have little to do with monetary policy, but given Powell speaks twice, we can expect some mention of the economy and the interest rate outlook.

The Fed maintained rates unchanged last Wednesday and said further rate hikes were likely. However, the Fed appeared to dismiss the odds of a December rate hike, which was a 'dovish' outcome consistent with a weaker Dollar.

In particular, Powell said, "given how far we have come [on rates and disinflation], along with the uncertainty and risks we face, the committee is proceeding carefully."

Powell also appeared to dismiss the usefulness of the September 'dot plot' chart, which signalled the Fed favoured one more rate hike this year. Powell said that the efficacy of the dot plot "decays between meetings".

To what extent is this theme confirmed this week will matter for the Dollar, particularly given Friday's surprisingly soft U.S. labour data.