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Pound to Dollar Week Ahead Forecast: Further Slide to 1.2255 or Below Possible

  • GBP/USD oversold but at risk of further slippage
  • Could find support near 1.2255, 1.2079 on charts
  • China economy risks aid USD ahead of CPI data 
  • Adds further short-term headwind for GBP/USD

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The Pound to Dollar exchange rate crumbled further into oversold territory on the charts last week but still risks additional losses that could pull it down to 1.2255 or below in the days ahead as mounting Chinese economic growth risks support the greenback ahead of the latest U.S. inflation report. 

Sterling capsized further against almost all counterpart currencies in the G20 contingent last week thanks in part to an almost two percent decline in the Pound to Dollar exchange rate, which tumbled beneath 1.25 to enter the new week trading mere inches above the round number of 1.23.

Last Thursday’s candid assessment from the Bank of England (BoE) of the difficulties likely lurking ahead for the UK economy and their constraining implications for the interest rate outlook have been the dominant drivers of Sterling’s declines although the Dollar did itself also rally.

“Wednesday’s FOMC meeting and Friday’s US employment report were arguably net negative for the greenback, as they reduced hawkish tail risks around mid-year funds rate pricing,” says Zach Pandl, co-head of global foreign exchange strategy at Goldman Sachs. 

“But even if Fed-related fears have eased on the margin, investors are still faced with downside risks to European economies from the war in Ukraine, and to the Chinese economy from weaker-than-expected policy support” Pandl and colleagues also said in a Friday research briefing. 


Above: Pound to Dollar rate shown at daily intervals with spread - or gap - between UK and U.S. government bond yields at 02-year and 10-year intervals. Click image for closer inspection. 


Friday’s payroll data showed U.S. wage growth moderating in a potentially dampening outcome for the inflation outlook during April while Wednesday’s Federal Reserve (Fed) policy decision also emerged as a taming influence for U.S. bond yields and for the Dollar.

However, the inflationary economic implications of the European Union’s stalled move toward a Russian oil embargo and global market volatility have kept the Dollar on its front foot and now the U.S. currency potentially stands to benefit from mounting concerns about the Chinese economic outlook.

"Much of the weakness in employment is outside of manufacturing and reflects covid lockdowns. Premier Li’s comments suggest the situation is worsening. The deteriorating situation in China’s economy has been and will remain a significant weight on AUD, NZD and CNH in the near term," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.  

All of this is after China’s Premier Li Keqiang was widely reported at the weekend to have called a step-up in authorities’ efforts to save jobs and support households as they grapple with the fallout from coronavirus containment measures in major metropolitan hubs including Shanghai and Beijing.  

“The employment situation is deteriorating along with the rest of the economy. All of April’s PMIs point to rising unemployment, despite government promises of support for firms hit by zero-Covid policies,” says Craig Botham, chief China+ economist at Pantheon Macroeconomics. 


Above: U.S. Dollar Index with Fibonacci retracements of 2001 and 2017 downtrends indicating prospective areas of short and medium-term technical resistance to any further Dollar rally. Click image for closer inspection.


The deteriorating economic backdrop and government’s growing desire to support Chinese growth is a downside risk to the Renminbi and upside risk for the USD/CNH pair which, in turn, implies ongoing headwinds for many other currencies relative to the U.S. Dollar from early on this week. 

"GBP/USD can remain soft this week because of a stronger USD and concerns about the UK economy amid the energy price shock. There is downside support for GBP/USD at 1.2112," CBA’s Capurso said in a Monday research briefing. (Set your own FX rate alert here).

International headwinds are an additional burden for the Pound to Dollar exchange rate ahead of this Wednesday’s release of April inflation data in the U.S. and Thursday’s publication of first-quarter GDP figures in the UK, both highlights of the week ahead for the Dollar and Sterling respectively.

“We think that based on market pricing of BoE rates that remains elevated (by about 75bps at least by year-end), and the UK’s macroeconomic backdrop, there’s room for additional GBP losses towards at least 1.2250 in the coming days—though its collapse since late-Feb is starting to look significantly stretched from a technical perspective,” warns Juan Manuel Herrera, a strategist at Scotiabank, in a Friday reference to GBP/USD.

Some measures of consensus suggest economists generally expect the more important rate of core inflation to have accelerated from 0.2% to 0.4% in month-on-month terms in the U.S. during April in what would be an unhelpful outcome for those in the market who may be looking for signs of inflation topping out.


Above: Pound to Dollar rate at weekly intervals with Fibonacci retracements of 2020 uptrend and various extensions indicating prospective areas of short and medium-term technical support for Sterling and resistance for the Dollar. Shown alongside relative-strength-index (RSI) measure of momentum. Click image for closer inspection.

 

"Headline inflation could increase further in some cases, also depending on energy prices, but we would expect core inflation in G10 to start falling in the months ahead and stop surprising market expectations," says Athanasios Vamvakidis, head of FX strategy at BofA Global Research.

"We see two main market themes for the rest of the year, in addition to possible data surprises as inflation peaks and growth slows. First, the war in Ukraine and in particular possible energy sanctions from Europe. Second, the Covid situation in China," Vamvakidis and colleagues said on Friday,

A crest and subsequent decline in the annual rate of U.S. inflation is crucial if the Fed is to be kept from raising its interest rate at the kind of pace that was at least temporarily ruled out in its May monetary policy decision last week, which is in turn a key determinant of the outlook for the U.S. Dollar.    

“One month’s reading doesn’t tell us much. We’d want to see evidence that inflation is moving in a direction that gives us more comfort,” Fed Chairman Jerome Powell said following last week's policy decision. 

As I say we’ve got two months now where core inflation is a little lower but we’re not looking at that as a reason to take some comfort. I think we really need to see that our expectation is being fulfilled. That inflation is under control and starting to come down,” he added in the Wednesday press conference.