Image: Doug Turetsky. Sourced: Flikr, licensing: CC 2.0.
However, resilience sets the GBP/USD up for a buy-the-fact response to next week's Federal Reserve decision.
The British pound is on course for a second weekly loss against the dollar after U.S. core inflation rose 0.3% in August, beating forecasts and lifting market-implied odds of a Federal Reserve rate hike next Wednesday to 90%.
Headline inflation rose 0.4% month-on-month and 3.4% year-on-year, while core inflation eased to 2.4% year-on-year from 2.5%.
Futures priced a 70% chance of a hike before the release, and the dollar is advancing against its major rivals as markets add to those bets, according to Corpay.
"In our view, the balance of risks facing the Fed now favours raising rates," says Karl Schamotta, Chief Market Strategist at Corpay.
A hike would lift the Fed's target range to 3.75-4.00%.
"The Fed can either choose a rate hike next week and a controlled rise in short term US borrowing costs, or do nothing and risk an uncontrolled rise in long-term US borrowing costs," says David Rees, Head of Global Economics at Schroders.
The print follows last week's strong payrolls report, which also pushed the pound lower against the dollar.
"By contrast, an upside surprise would likely see the USD rally as the market hawkishly repriced," says Daragh Maher, Senior FX Strategist at HSBC, in a note issued ahead of the release.
The chart points to further near-term pressure: the pound-to-dollar rate trades at 1.3508 after another rejection beneath the 21-day moving average at 1.3559.
Above: GBP/USD daily chart with the 21-day moving average and key horizontal levels.
The 21-day has flattened after rising through August, and this week's recovery attempt failed beneath it for a second time since the late-August turn lower.
The pair trades on 1.3506, the level where August's advance began.
The day's low at 1.3481 holds above the early-September trough near 1.3475, and a hot core print with 90% hike odds has not broken that floor.
That resilience argues against capitulation.
Any meaningful selling pressure from here and the 200-day moving average at 1.3453, which BBH identifies as the next major support, is in play. And then the 100-day near 1.3436 forms a second line beneath:
A daily close through that band would expose 1.3302, the base of the range that has held since April.
Before the release, markets already priced nearly 90 basis points of cumulative Fed tightening through next September, with three hikes fully priced by April, according to a BofA Global Research report.
In other words, a September hike and two more are already in the dollar's price.
"Even if a September Fed hike becomes a done deal, we doubt USD will make new cyclical highs because tightening by other major central banks limits policy divergence," says Elias Haddad, Global Head of Markets Strategy at BBH.
To extend its gains after the decision, the dollar needs guidance from Chair Kevin Warsh that goes beyond current pricing.
"A less-hawkish-than-expected message could weigh on the USD and JPY, while a hawkish BoE hold could support sterling," say Constantin Bolz and Teck Leng Tan, Strategists at UBS Global Wealth Management.
GBP/USD: Bank of England Follows a Day Later
The Bank of England decides on Thursday, and Deutsche Bank expects a 6-3 vote to hold Bank Rate at 3.75%, with Huw Pill, Megan Greene and Catherine Mann voting for a hike.
"Put simply, we think the MPC's patience may be running thin. And the case for staying on hold is weakening slowly," says Sanjay Raja, Chief UK Economist at Deutsche Bank.
July GDP growth of 0.4%, against a consensus forecast for no growth, adds to that case.
"The GDP beat points towards GBP/USD attempting to test back towards 1.3560," says Jeremy Stretch, Head of G10 FX Strategy at CIBC.
That level coincides with the 21-day average.
BBH says the data do not justify swaps pricing a full 100 basis points of Bank of England hikes over the next twelve months.
"Bottom line: GBP is vulnerable to a dovish BOE repricing," says Haddad.
GBP/USD: Buy-the-Fact on Fed Decision
CIBC argues currency markets are yet to catch up with the move in interest rates.
"Our models suggest that just 55% of the move in FX in recent days is attributed to a repricing of the Fed, which is historically very low," says CIBC.
CIBC looks for the dollar index to recover to its 100-day average at 99.78.
A dollar catch-up of that kind is the scenario that tests the 1.3436-1.3453 band.
Pound Sterling Live's short-term view is that the pound stays pressured against the dollar into Wednesday, and its resilience above 1.3475 opens the door to a buy-the-fact recovery once the Fed delivers.
The 21-day at 1.3559 is the first objective on a post-Fed recovery, with the top of the range at 1.3661 and August's high at 1.3676 beyond.
Warsh's press conference on Wednesday decides the trade: a hike with no signal beyond current pricing clears the path to 1.3559, while a pledge of further tightening would test 1.3453.
