**GBP/USD Weekly Forecast: Correlations Strengthen but Signs of Exuberant Strength Emerge**
*Based on the article by Justin McQueen, ForexFactory.com*
The GBP/USD currency pair remains one of the most closely watched in global forex markets, acting as a bellwether for broader macroeconomic trends due to the prominence of both the British pound and the US dollar. In the week ahead, the pair presents an intriguing mix of technical momentum, deepening correlations, and growing indications that the bullish narrative may be approaching the limits of its exuberance. This comprehensive outlook draws on key economic data, central bank signals, and inter-market dynamics to explore whether sterling’s gains are sustainable or at risk of unwinding.
**I. Recent Price Action and Technical Overview**
– The GBP/USD pair has maintained an upward trajectory for several weeks, closing at 1.2720 on Friday.
– During the week, sterling advanced 0.7 percent, adding to its year-to-date gains while outperforming most major G10 peers except the euro.
– Technical signals indicate bullish momentum:
– Price is above the 200-day simple moving average (SMA), usually indicative of an uptrend.
– The pair remains above the key psychological level of 1.2700, reinforcing near-term support.
– Momentum oscillators such as the Relative Strength Index (RSI) approach overbought territory, registering above 60 (with 70 marking overbought conditions).
**II. Macro Drivers Shaping GBP/USD**
*1. UK Economic Data and Monetary Policy*
– Recent economic releases from the UK have generally beaten expectations, contributing to sterling’s relative strength.
– Highlight data and events include:
– Services sector PMI increased to 53.4 in May, a robust expansion reading.
– Wage growth remains elevated: Regular pay grew at an annual rate of 6.1 percent per the Office of National Statistics.
– Inflation has moderated but remains above the Bank of England’s (BoE) 2 percent target, with CPI at 2.3 percent.
– The BoE’s June interest rate decision is in focus. While markets expect a dovish hold, the resilience of wage growth and stickier inflation have prompted investors to reassess the pace and depth of rate cuts this year.
– According to BOE rate futures:
– Markets price in roughly 31 basis points of cuts by December (essentially one 25 bp rate cut fully expected, with odds of a second cut in 2024).
– This is more hawkish than earlier in the year, where two rate cuts were anticipated.
– In summary, the shifting central bank picture has provided sterling with sustained support, as the BoE is expected to lag the Federal Reserve in rate cuts.
*2. US Economic Data and the Federal Reserve*
– US macroeconomic data has painted a nuanced picture:
– Nonfarm payroll growth cooled in May, but the unemployment rate remains low at 4.0 percent.
– CPI inflation has shown signs of moderation but is still above the Fed’s 2 percent target, encouraging a wait-and-see approach to policy.
– Recent comments from FOMC members have consistently stressed patience, and the market expects the first rate cut no earlier than September.
– According to CME FedWatch:
– The probability of a 25 bp cut by September stands at approximately 63 percent.
– Total expected cuts for 2024 have fallen to less than two, down from three expected earlier this year.
**III. Growing Market Correlations**
Market correlations are an essential lens through which to assess GBP/USD price action. Notably, the following dynamics are in play:
– GBP/USD has shown a strong positive correlation to risk sentiment as defined by major equity indices (notably the S&P 500 and FTSE 100). Rallying equity markets have therefore indirectly fueled sterling gains.
– Correlations with interest rate differentials
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