The GBP/USD exchange rate is expected to potentially test the $1.28 level in the week ahead, driven by strong technical momentum and a potential undershoot in the critical U.S. job report. The exchange rate has been in a short-term uptrend, suggesting that reaching and surpassing 1.28 is a feasible goal in the coming days.
Technical Analysis and Momentum
The Pound is showing robust technical momentum, with the Relative Strength Index (RSI) at 63 and trending higher. Additionally, the exchange rate remains above its key moving averages, reinforcing the bullish sentiment. For dollar buyers, the 1.28 level is crucial. However, if this week’s data favors the Dollar, the key support level to watch is 1.2685. This level has been tested repeatedly over the past two weeks, and a breach here could signal a potential reversal in the uptrend.
Impact of UK Data
This week, the UK economic calendar is relatively quiet, which may support the Pound Sterling. The absence of significant data releases or interventions from Bank of England policymakers—who seem keen to cut interest rates at the earliest opportunity—tends to be favorable for the Pound. Historically, the currency performs better when it is not subject to negative economic surprises or dovish policy hints.
U.S. Economic Data
In contrast, the U.S. economic calendar is more eventful. Monday’s PMI print from the U.S. might attract some market interest, although the primary focus will be on Friday’s nonfarm payroll report. Last month, U.S. nonfarm payrolls fell below 200,000 for the first time since the fourth quarter of 2023, raising concerns about the strength of the labor market. Analysts are closely watching this month’s release to determine if the previous figure was an anomaly or indicative of a broader cooling trend in employment.
Dominic Schnider, a strategist with UBS’ Chief Investment Office, emphasizes the importance of this report. The market anticipates a headline nonfarm payroll reading of 180,000 and an unemployment rate of 3.9%. Average hourly earnings are expected to have increased by 3.9% year-on-year. If the labor market data is softer than expected, the market might increase the probability of a rate cut by the Federal Reserve in July, which would likely weaken the USD further.
Federal Reserve’s Stance
The Federal Reserve is not in a rush to cut interest rates, with current market pricing indicating one full rate cut by December, and a 50/50 chance of a cut by September. This week’s jobs report and wage data are expected to provide further insights into the Fed’s next moves. Recently, bond yields have risen, reflecting investor concerns about prolonged high interest rates. However, if a series of below-forecast U.S. data emerges, this sentiment could shift, potentially leading to a decisive breakdown in the US dollar and initiating a new downward trend. Conversely, if the data remains strong, risk sentiment may be negatively impacted as expectations for rate cuts are pushed further out.
Market Sentiment and Implications
Fawad Razaqzada, an analyst at City Index, notes that the upcoming jobs report is crucial for shaping market expectations. If the data suggests a cooling labor market, the likelihood of a rate cut increases, weakening the Dollar. However, persistently strong data could have the opposite effect, maintaining pressure on the Dollar as rate cut expectations are deferred.
In summary, the Pound to Dollar exchange rate is poised for potential gains, targeting the 1.28 level. Strong technical momentum supports this view, while the upcoming U.S. job report holds the key to near-term movements. A weaker-than-expected jobs report could boost the Pound, whereas strong data might bolster the Dollar, testing the resilience of the 1.2685 support level. The interplay between UK calm and U.S. economic indicators will be crucial in determining the trajectory of GBP/USD in the week ahead.
