We are bearish on GBP/USD and expect more downside in the pair and we have Both UK and US inflation data this week. Our view of the fundamentals, sentiment, and technicals are below...
Bank of England Interest Rate Outlook
The Bank of England reduced interest rates to 5% at their recent meeting and we are looking for another cut in September and up to 100 bps of cuts by year end which is not the market view which is looking for just 50 bps.
UK Inflation Data
We have UK CPI this week and inflation is forecast to rise to 2.3% annually in July after remaining at the Bank of England's 2% target for a second consecutive month in June. “While headline inflation has been at 2% for 2 consecutive months, the BoE itself forecasts a rise to 2.7% by the end of the year before a return to target in 2026.” (BCA Research)
US Inflation Data
We expect a number below forecast to weigh on sterling on the other side of the pair we have US CPI inflation data this week: “The June CPI report brought welcome news of slowing inflation, with core CPI rising by a mere 0.06% m/m, marking the smallest increase since January 2021. While we expect a bit of a firmer report in July, we still expect it to be “very good” in the eyes of Fed policymakers,” (BNP Paribas)
Consensus sees US inflation rising 0.2% month-on-month when data for July is released on Wednesday, which is forecast to see the annual inflation rate move down to 2.9%, from 3% in June. The market is looking for 100 bps of cuts from the Fed double what they expect from the Bank of England. This pricing doesn't make sense in our view, with US inflation stubborn and an economy that while slowing doesn't warrant aggressive interest rate cuts
Sentiment
The main reason to be bearish of the GBP is the big net long position held by speculators, while we have come down from a record long position, the number of speculative longs is high in historical terms and points to more downside.
Technical Analysis
Our view of the key levels of support and resistance to look out for below.
