**GBP/USD Weekly Forecast: Correlations, but Signs of Exuberant Optimism**
*By Eliman Dambell, originally published on Forex Factory*
**Introduction**
The GBP/USD pair, one of the most widely traded currency pairs, has seen significant volatility in the past week. Traders and investors are paying close attention to the complex interrelationships driving the pair, from macroeconomic data releases on both sides of the Atlantic to shifting risk sentiment and the evolving stance of the US Federal Reserve and the Bank of England (BoE). This article provides a comprehensive weekly outlook for GBP/USD, analyzing recent price action, key drivers of movements, correlations with broader markets, and potential scenarios going forward.
**Recent GBP/USD Performance Overview**
Last week, GBP/USD traded with a strong bullish bias, accelerating above the 1.2800 handle for the first time in months. The pair’s rally has been powered by a combination of softer-than-expected US macroeconomic indicators, persistent risk-on sentiment in global markets, and market expectations that the Federal Reserve is close to commencing an interest rate cutting cycle.
However, even as sterling has shown resilience, several technical and fundamental signals hint that current momentum may be overextended. Let’s delve into the symmetry of recent moves, the macro backdrop, and what the week ahead might hold.
**Key Drivers for GBP/USD**
*1. US Dollar Weakness*
– US CPI data reinforced expectations of Fed rate cuts.
– Weaker jobless claims and poor manufacturing data signaled that US economic momentum may be fading.
– The DXY Dollar Index dropped to multi-week lows, providing broad-based support to GBP/USD.
*2. Bank of England and Sterling Fundamentals*
– The Bank of England is maintaining a cautious, data-dependent stance but is showing less urgency to cut rates compared to the Fed.
– The UK’s own economic data is showing improvement, especially in business surveys and labor markets, bolstering the GBP.
– Speculation persists regarding election risk and fiscal policy changes in the UK, which can add volatility.
*3. Correlation With Other Asset Classes*
– A surge in global equity markets, especially US indices, supports risk-on sentiment.
– GBP/USD has been positively correlated with US stocks as risk appetite grows.
– Yields on US Treasuries continue to fall as investors price in rate cuts, while UK gilt yields have remained more stable.
*4. Technical Factors and Market Sentiment*
– Short-term momentum indicators signal overbought conditions for GBP/USD.
– A strong bullish move has left fewer support levels immediately below current prices, increasing the risk of a pullback.
– Positioning data shows that speculative long exposure on sterling/USD is at a multi-week high, marking possible exuberance.
**Macro Backdrop: UK and US Data Releases**
*United States*
The US released a batch of economic data sets that significantly influenced the forex markets:
– CPI inflation data cooled further, bolstering the view that the Federal Reserve will be able to ease monetary policy.
– Retail sales and manufacturing data disappointed, suggesting a broader slowdown.
– Initial jobless claims are rising, and wage growth is moderating, indicating a softer labor market.
*United Kingdom*
UK data surprised largely on the upside:
– Flash PMI data showed services and manufacturing rebounding, suggesting a pickup in Q2 GDP growth.
– The labor market remains robust, though wage growth is cooling.
– The BoE has expressed some caution about underlying inflation persistence but is not in a rush to cut rates.
**GBP/USD: Technical Analysis**
*Daily and Weekly Charts*
GBP/USD saw a strong rally, topping key resistance levels that had capped gains for much of the last quarter. Bulls pushed the price towards the 1.2800 and 1.2900 resistance zones, with the possibility of retesting the psychological 1.3000 level if bullish momentum persists.
*Key Technical Levels:*
– **Resistance**: 1.2850, 1.
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