- An unexpected spike in services inflation complicated the outlook for BoE rate cuts.
- Data revealed an unexpected 1% increase in UK retail sales.
- The dollar rebounded against a weak yen on Friday.
The GBP/USD outlook shows a slight shift in sentiment as the pound pulls back from recent highs. The decline comes as the dollar broadly recovers after the Bank of Japan failed to support the market’s hawkish outlook.
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Sterling had a strong rally last week as data reduced bets for Bank of England rate cuts. The first report of the week on Wednesday revealed that inflation held steady at 2.2%. However, there was an unexpected spike in services inflation, complicating the outlook for rate cuts. Policymakers have remained cautious despite low headline inflation figures. Their focus remains on the services sector, where price pressures remain high.
The second major report came on Friday, showing an unexpected 1% increase in August retail sales. The UK economy has performed better than most expected in recent months. Therefore, the Bank of England has more room to pause before resuming rate cuts. Currently, market participants are pricing a 71% chance of a 25-bps BoE rate cut in November. However, this outlook might keep shifting with incoming data.
Meanwhile, the dollar plunged on Wednesday last week after the Fed implemented an unexpected 50-bps rate cut. It was an aggressive start to an easing cycle that will continue to hurt the greenback. Traders are betting on another such rate cut in November.
However, the dollar rebounded against a weak yen on Friday after a disappointing BoJ policy meeting. This strength spread across the board, affecting the pound. Still, fundamentals support more upside for GBP/USD.
GBP/USD key events today
- US flash manufacturing PMI
- US flash services PMI
GBP/USD technical outlook: Bullish momentum weakens
On the technical side, the GBP/USD price is retreating after failing to sustain a move above the 1.3301 resistance level. Nevertheless, the bias is still bullish because the price trades above the 30-SMA, with the RSI above 50.
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GBP/USD has maintained a bullish trend since the price broke above the 30-SMA. It has made consistent higher highs and lows. However, the RSI has made a slight bearish divergence, indicating weaker momentum. Furthermore, price action shows bears are gaining strength after making an engulfing candlestick pattern.
Therefore, the price might soon challenge the SMA. A break below would indicate a reversal. Otherwise, the bullish trend will continue.
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