GBP Bulls Eye Fresh Catalyst with UK Employment Data

GBP KEY POINTS:

READ MORE: GBP Breaking News: UK Economy Expands 0.1% in Q1 of 2023, GBP/USD Bid

BoE MEETING AND UK GDP IMPACT

The GBP selloff continued following Thursdays BoE meeting and gathered pace on Friday as GBPUSD slipped below the 1.2500 psychological level, trading at 1.2460 at the time of writing. The selloff in GBPUSD had more to do with the dollar than the GBP evidenced by the gains put in by sterling against the Euro.

The Bank of England (BoE) meeting delivered some interesting takeaways, most notably the upgrades to the Central Banks growth forecasts. The bank maintained its recent stance with vague forward guidance, towing the line that further hikes could come if inflation shows greater signs of “persistence”. Looking more closely at the BoE forecast and the Central Bank expects inflation to decline to well below its target over the next 24 months. Energy costs are seen as a major factor here interestingly enough the projections don’t require any further interest rate hikes, with the current rate of 4.5% seen as restrictive enough. However, like many Central Banks the BoE are navigating unchartered territory. The selloff in cable in the aftermath of the rate hike was more down to resurgent dollar strength than GBP weakness.

Friday morning brought UK GDP data and by all accounts the surface paints a pretty picture with Q1 GDP growing at 0.1%. Upon closer inspection however, the February stall and March contraction don’t bode well for Q2. Comments from the ONS suggests that Marchs contraction was a once off due to the poor weather as retail sales were also affected.

Source: ONS

As much as market participants and commentators may keep a close eye as GDP data for Q2 begins to filter through, GDP will have little impact on the way forward for the BoE. The Central Bank will no doubt have all its focus on UK inflation and how that shapes up for the rest of Q2.

LOOKING AHEAD TO NEXT WEEK

Looking at the week ahead and potential risk for the GBP moving forward UK employment and in particular wage data will be the focus. The Bank of England (BoE) made it clear this week that two set of wage and inflation data releases would determine the path for the Central Bank adopts in June. With two policymakers already voting to keep rate hikes on hold (Dhingra and Tenreyro) with wage growth likely to hold the key. There have been recent signs from BoE Business Survey of a potential moderation on this front but let’s see what Tuesdays reading holds. An upside surprise in wage growth could increase rate hike probabilities with GBP catching a bid while a decline may strengthen the cause of market participants expecting a pause by the BoE in June.

General market sentiment remains fragile with increasing uncertainty surrounding the US debt ceiling further weighing on the overall mood. This might not hold any direct sway over the Pound, but GBPUSD may face challenges from a USD perspective. Surprisingly the US debt default situation has been supportive of the USD of late as markets seek the shelter of havens, with the JPY as well benefitting of late. This presents downside risk for GBPUSD, with any developments on the US default or heightened recessionary fears to be felt across markets.

UK ECONOMIC CALENDAR FOR THE WEEK AHEAD

Following two massive weeks of event risk, the UK economic calendar is set to enjoy a subdued week. Over the course of the week, there is only two ‘high’ rated data release, whilst we also have four ‘medium’ rated data release.

Here are the two high ‘rated’ event for the week ahead on the Eurozone economic calendar:

• On Tuesday, May 12, we have Employment Change data for February due at 06h00 GMT.
• On Tuesday, May 12, we also have Unemployment rate for March due at 06h00 GMT.

For all market-moving economic releases and events, see the DailyFX Calendar

GBPUSD FINAL THOUGHTS AND TECHNICAL OUTLOOK

GBP bulls appear to have run out of steam based on Thursday selloff. Friday did see a return of some buying pressure with the RSI entering overbought territory. However, a large driver of the move was notably down to a resurgence in the Dollar Index and haven demand.

Given the positive BoE announcement and the potential for a further rate hike GBPUSD failed to break above the key resistance area around the 1.2660 area. There is every chance that the week ahead sees GBPUSD range trade between the 1.2450 support area and the recent high around the 1.2670 handle. GBPUSD remains bullish without a daily candle close the swing low around 1.2460.

Key Levels to Keep an Eye Out For

Resistance levels:

Key support levels:

• 1.2450
• 1.2360 (50-day MA)
• 1.2250 (100-day MA)

GBPUSD D Chart, May 12, 2022

Source: TradingView, Prepared by Zain Vawda

— Written by Zain Vawda for DailyFX.com

Contact and follow Zain on Twitter: @zvawda