GBP/USD forecast as Fed interest rate cut hopes rise

August 03, 2024 11:34 PM PDT | By Invezz

GBP/USD forecast as Fed interest rate cut hopes rise — Image source: Invezz

Bank of England rate cuts

The Bank of England decided to slash interest rates by 0.25% as most analysts were expecting. 4 members of the committee preferred leaving rates unchanged because, while the UK has achieved its 2% inflation target, service and core inflation figures are still stubbornly high.

Rents, which are influenced by mortgage rates, are the biggest part of the UK’s inflation. As such, the BoE hopes that lower rates will help to slow rent price increases in the near term.

The UK interest rates have now fallen to 5.0% and analysts expect that the bank will deliver one or two more cuts later this year. These cuts will depend on whether inflation remains low in the coming months.

The BoE hopes that the rate cuts will stimulate the economy at a time when it is showing signs of deteriorating. For example, the government has identified a big £22 billion hole in its budget while the labor market is still not strong with the unemployment rate sitting at 4.4%.

Other data revealed that retail sales are not going on well while the UK is expected to be the slowest-growing economy in the G7.

The UK will publish several important economic data this week. On Monday, S&P Global will release its estimate of the country’s services and composite PMI numbers. Economists believe that the two PMIs stood at 52.4 and 52.7, respectively.

The other crucial data will be the UK house price index (HPI) by Halifax, which will come out on Tuesday. Also, the RICS house price balance will come out on Thursday.

While these numbers are important, their impact on the GBP/USD pair will be limited since the BoE has already delivered its interest rate decision.

Federal Reserve interest rates

The other important GBP/USD news was Wednesday’s Federal Reserve decision. As was widely expected, the Fed decided to leave interest rates unchanged between 5.25% and 5.50%. It has maintained these rates since 2023.

The biggest change in the Fed’s statement was that the officials left the door open for cutting rates in its September meeting. In his statement, Jerome Powell noted that the bank would maintain its data-dependence in determining whether that cut will be necessary.

Well, the first important data after the Fed decision showed that things were not going on well. The nonfarm payrolls data showed that the job market is in trouble as the unemployment rate rose to 4.3%, the highest increase since 2023.

Additional data showed that the US created just 117k jobs in July after adding over 170k in the previous month. If the recent trend continues, then it means that the Bureau of Labor Statistics (BLS) will revise the July job additions lower.

The NFP report also showed that wages have stopped growing as they did before while the manufacturing sector is not doing well. That confirmed what the recent manufacturing PMI data showed last week. According to the ISM and S&P Global, the manufacturing PMI remained below 50 in July.

Therefore, analysts believe that the Fed will deliver its first interest rate cut in September. What is unclear is on the number of cuts to expect this year. Some analysts believe that the bank should deliver at least two cuts while others see three cuts.

The clear message in today’s soft jobs report is the Federal Reserve needs to cut interest rates. They should have begun cutting rates months ago. Job growth is decidedly throttling back, unemployment is rising quickly, hours worked per week are low and falling, and temporary… — Mark Zandi (@Markzandi) August 2, 2024

Looking ahead, the next important catalyst for the GBP/USD pait will be the upcoming US inflation numbers that will come out next week. If the data confirms that inflation is comimg down, they will confirm that the Fed will cut rates. Still, in the past statements, Jerome Powell has insisted that the Fed was more concerned about the labor market instead of inflation.

The other key event will be the Jackson Hole Symposium, which is set to happen later this month. This is an important annual jumboree of global central banks where officials meet and deliberate on key issues. It has formed an important place for key central bank statements.

GBP/USD technical analysis

GBP/USD chart by TradingView

The daily chart reveals that the GBP to USD exchange rate made a strong bullish breakout and reached a high of 1.3048. This breakout happened after the pair formed an inverse head and shoulders chart pattern.

The pair has now retreated sharply and moved slightly below the 50-day moving average. It is also hovering at the psychological level of 1.2800 while the two lines of the MACD have formed a bearish crossover.

Therefore, the GBP/USD pair will likely resume the uptrend as hopes of several Fed rate cuts remain. If this happens, it will bounce back and retest the resistance point at 1.300.

The post GBP/USD forecast as Fed interest rate cut hopes rise appeared first on Invezz

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