- An unexpected jump in services inflation complicated the outlook for a BoE rate cut.
- The data revealed an unexpected 1% rise in UK retail sales.
- The dollar strengthened against a weak yen on Friday.
The GBP/USD outlook shows a slight shift in sentiment as the pound retreats from recent highs. The decline comes as the dollar largely recovers after the Bank of Japan failed to support the market’s hawkish outlook.
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Sterling rallied strongly last week as the data reduced bets on a Bank of England rate cut. The first report of the week on Wednesday revealed that inflation remained steady at 2.2%. However, there was an unexpected spike in services inflation, complicating the outlook for rate cuts. Policymakers remained cautious despite low inflation data. Their focus remains on the services sector, where price pressures remain high.
The other big report came on Friday, showing an unexpected 1% increase in August retail sales. The UK economy has performed better than expected in recent months. Therefore, the Bank of England has more room to pause before continuing to cut interest rates. Currently, market participants estimate a 71% chance of a 25 basis point BoE rate cut in November. However, this outlook could change with incoming data.
Meanwhile, the dollar fell on Wednesday last week after the Fed implemented an unexpected 50 bps rate cut. It was an aggressive start to an easing cycle that will continue to hurt the dollar. Traders are betting on another such rate cut in November.
However, the dollar rallied against a weak yen on Friday after a disappointing BoJ policy meeting. This strength spread across the board, affecting the pound. However, the fundamentals support more upside for GBP/USD.
GBP/USD key events today
- US manufacturing PMI
- US flash services PMI
GBP/USD Technical Outlook: Bullish momentum is weakening
On the technical side, the GBP/USD price is pulling back after failing to sustain a move above the resistance level at 1.3301. However, the bias is still bullish as the price is trading above the 30-SMA, with the RSI above 50.
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GBP/USD has maintained a bullish trend since the price broke above the 30-SMA. He made consistent bigger highs and lows. However, the RSI has made a slight bearish divergence, indicating weaker momentum. Moreover, the price action shows that the bears are gaining strength after forming a candlestick pattern.
Therefore, the price may soon trigger an SMA. A break below would indicate a reversal. Otherwise, the bullish trend will continue.
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