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How will the pound perform against the dollar this week? Technical signals and fundamental developments point to a limited extension of the recovery.
The balance of probabilities remains slightly in favour of the dollar while GBP/USD trades beneath its falling 21-day and 100-day moving averages.
However, the pound-to-dollar exchange rate recorded a solid 1.17% advance last week as it shows signs of stabilisation and a desire to build a more enduring recovery, having recently fallen as low as 1.3160.
But the recovery must now prove itself by breaking through nearby resistance.
The pair has now reclaimed its 21-day moving average, signalling that short-term downside momentum is fading. This matters because the 21-day average had been capping rallies during the June decline; moving back above it suggests Sterling is attempting to build a base.
The key question for the week ahead is whether GBP/USD can convert this rebound into a broader recovery.
For that to happen, the exchange rate needs to hold above the 21-day average and push towards the more important 100-day moving average near 1.3407.
That remains the major technical hurdle: below it, the rally is still best viewed as corrective; above it, the outlook would turn more decisively constructive.
Fundamental Drivers to Watch: U.S. Data and Fed Update
As has been the case over recent weeks, the USD side of the equation will remain the primary driver of GBP/USD direction.
Last week's U.S. jobs report proved an important moment for USD, as it punctured a growing U.S. exceptionalism trade: after a run of above-consensus data prints, here was an undershoot.
This week, the data watching continues with ISM services due for release Monday, which will give a timely snapshot of activity in this important sector. An above-consensus reading can help USD steady.
But beyond Monday, the remaining numbers are second-tier and unlikely to shift the needle for the dollar.
"The more important focus will be on the Fed minutes (Wed), which should offer more colour on the first Warsh-led FOMC debate," says a daily market note from Lloyds Bank.
"The market will be interested in how pared back that document might be given the heavily trimmed statement and the general reticence of the new chair to say anything but the obvious, or just respond with a reference to the appropriate “taskforce”, as part of his journey to reduce Fed guidance," adds Lloyds.
What's Driven Dollar Strength Lately, and Can it Continue?
The key driver of U.S. dollar outperformance through June and into early July has been the rapid recalibration of the market's expectation of what the Federal Reserve will do to interest rates in the coming months.
The market has swung from expecting cuts to expecting rate hikes in a short period of time, but over recent days (particularly in the wake of the jobs report), traders have started to cool expectations for a hike again.
So there's a pendulum of Fed expectations that is reflected in the dollar's fortunes. Where it swings next will determine how GBP/USD trades.
"The hawkish outcome of the June Fed policy meeting has been the most important recent event for FX markets, helping propel the USD to its highest level in more than a year of late," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.
Though appointed by President Trump, who had pressured predecessor Jerome Powell to cut rates, Warsh signalled he will not bend to that pressure.
The Fed held rates steady in June and reaffirmed its focus on price stability, while it published a dot plot showing 9 of 18 governors favouring hikes this year alongside raised inflation projections.
The dollar rose across the board on the news, with the pound-to-dollar rate falling 1.0% to 1.3375.
The dollar's strength can be attributed to two forces working together: the hawkish steer itself, and a recovery in the Fed's institutional credibility, since re-anchoring the Fed under Warsh can reduce the negative premium that had built up on U.S. assets.
Wednesday's Fed minutes will shine more light on these dynamics.
