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GBP/USD reached a 12-week high in recent trading, extending gains to the 1.2817 resistance level before settling around 1.2775 at the time of writing. Clearly, the gains came amid renewed US dollar weakness, with analysts seeing potential for further advances if upcoming US jobs data disappoints. Overall, the dollar has been sold off on the back of weak domestic data, while the sharp decline in crude oil prices has also weighed on it.
According to analysts at UniCredit Bank, news that the ISM manufacturing survey fell below 49 in May has increased pressure on the US currency across the board, leading the US Dollar Index (DXY) to return to the 104 level. Consequently, the EUR/USD and GBP/USD pairs have accelerated their recovery back above 1.09. and 1.28 respectively.
According to the results of the economic calendar, US ISM manufacturing PMI fell to a reading of 48.7 in May from 49.2, missing expectations of 49.6. Moreover, the price paid in component of the report came in at 57, down from 60.9 and below estimates of 60. Overall, the US ISM manufacturing report was weak, echoing the message from last week's weak US personal consumption expenditure report and the Chicago PMI, and painting a contrasting picture from the Markit manufacturing PMI for May.
On the US labor market front, US job openings fell by 296,000 from the previous month to 8.059 million in April 2024, the lowest since February 2021 and missing the market consensus of 8.34 million. During the month, job openings in health care and social assistance (-204,000) and government education (-59,000) fell, but increased in private education (+50,000). In terms of regional distribution, job openings fell sharply in the Midwest (-224,000), the Northeast (-97,000) and the West (-67,000), while they rose in the South (+93,000).
Looking ahead for GBP gains, Morgan Stanley expects total return differentials to support GBP. "While we expect the Bank of England to cut rates by 200 basis points by the end of 2025, it still retains the highest rates in Europe, which also provides it with some carry support. This allows EUR/GBP to retest the 2022 low of 0.82."
According to Bank of America,“The June rate cut has been largely a done deal so far, but the wrangling over subsequent cuts has begun”. Remember our base case, three quarterly cuts this year, the next in September, then five more in 2025 at a 2% Depo rate.
In terms of UK data, Lloyd's business confidence data posted a strong May advance to an 8-year high. Nationwide also reported a 0.4% increase in house prices for May, with an annual increase of 1.6%. However, there was a slight dip in mortgage approvals to 61,100 in April from a revised 61,300 the previous month. Overall, the data continued to support expectations of a gradual recovery in the UK economy, although the overall impact was limited. Eventually, the Bank of England's outlook will remain key over the medium term, although the short-term outlook has been overshadowed by the general election campaign.
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Technical forecasts for the GBP/USD pair today:
The overall trend for the GBP/USD exchange rate may remain bullish until the markets react to the announcement of US employment figures, which will have a strong and direct impact on the future policy of the US Federal Reserve. Technical expectations for a move toward the psychological resistance level of 1.3000 will increase if the bulls push toward the resistance levels of 1.2830 and 1.2920, respectively. Obviously, this may happen if the US employment figures are disappointing. Conversely, over the same time period, the support levels of 1.2675 and 1.2600 will be the most significant for the bears, and current upward attempts will collapse if these levels are breached.
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