**GBP/USD Weekly Forecast: Correlations, but Signs of Exuberant Bulls?**
*Adapted from original analysis by Yohay Elam for Forex Factory*
**Overview**
The British Pound (GBP) has experienced significant moves recently, with the GBP/USD pair pushing towards multi-week highs. Enthusiastic bulls have driven Sterling significantly higher, even as some underlying fundamentals remain somewhat mixed. This article delves into the current state of GBP/USD, analyzes the key drivers behind recent price action, considers relevant correlated asset movements, and evaluates whether sterling’s recent push is sustainable.
**GBP/USD Recent Performance**
Last week, the GBP/USD pair rallied over 200 pips, continuing a rise that began at the start of June. The currency pair managed to break through the psychologically important level of 1.2800, reaching highs not seen since March.
Key elements of last week’s action:
– The pair surged as sentiment around the UK economy seemed to improve.
– US Dollar weakness contributed to the rally, driven by falling US bond yields and dovish Federal Reserve expectations.
– GBP bulls shrugged off some disappointing UK data, focusing instead on broad USD sentiment and expectations for Bank of England policy.
**Market Sentiment and Exuberance**
While GBP/USD has posted impressive gains, several analysts are cautioning that sterling bulls may be behaving exuberantly, not fully appreciating potential headwinds.
Warning signs include:
– UK macro data, particularly PMIs and retail sales, have not confirmed a burst of economic momentum.
– The Office for National Statistics (ONS) recently revised Q1 GDP downward, revealing the UK experienced a technical recession.
– Despite the rally, UK inflation is cooling, and markets are pricing in more than one rate cut from the Bank of England this year.
**Exploring Correlations Driving GBP/USD**
Correlations are a crucial tool in forex analysis. They help reveal how other financial assets and instruments influence currency moves.
Notable correlations to monitor:
– **US Dollar Index (DXY):** As with most major pairs, GBP/USD often moves inversely to the DXY. Last week, the DXY lost ground as US yields dropped.
– **Interest Rate Differentials:** The difference between UK and US short-term yields is pivotal. Recent dovish Federal Reserve commentary led to a narrowing of the spread, boosting GBP.
– **Equity Markets:** Risk appetite, especially in US and global equities, also filters into GBP/USD. As equities rose, so did cable, pointing to a risk-on environment.
**UK Economic Calendar and Key Releases**
The upcoming week features critical data that may shape the next GBP/USD leg:
– **Services PMI Final (Tuesday):** Services dominate the UK economy, so any revision will be closely watched.
– **BOE Governor Bailey Speaks (Wednesday):** The central bank’s tone remains crucial for GBP. Any hints at dovishness or concerns about the economy may cap recent gains.
– **UK GDP (Thursday):** May GDP is expected to rebound after recent weakness. A better-than-forecast print could fuel further bullish momentum.
– **US CPI and PPI (Thursday, Friday):** With the US dollar a key driver, inflation data from America can quickly reverse or reinforce the current GBP trend.
**Technical Analysis**
From a technical standpoint, GBP/USD’s pattern has evolved bullishly, but not without potential caution signs on the horizon.
Key technical observations:
– The pair broke above multiple resistance zones, with 1.2820 now turning into potential support.
– Daily Relative Strength Index (RSI) has neared overbought territory, hinting at possible exhaustion.
– Next significant resistance is seen near March’s highs at 1.2890 and then 1.3000.
– Should a pullback occur, the first target is the previous breakout zone around 1.2750 and then 1.2670.
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