GBP/USD forecast: Dollar regains the upper hand as oil surge clouds the Fed outlook

The pound has ben strengthening all week, and despite a renewed flare-up in geopolitical tensions between the US and Iran, which pushed crude oil prices sharply higher, the cable has barely flinched. But if the situation deteriorates, and oil prices remain elevated for longer, this will prompt investors to reassess the outlook for US monetary policy, which, in turn, could negatively impact the GBP/USD forecast. For now, side-ways trading is likely to dominate the agenda, with the US dollar likely to find dip buyers ahead of US CPI next week.

 

While the reaction in foreign exchange has so far been relatively restrained compared with moves in energy markets, the implications for monetary policy are becoming increasingly difficult to ignore. Higher oil prices threaten to slow the disinflation process that has underpinned expectations for easier central bank policy this year. If energy prices remain elevated, the Federal Reserve may find itself keeping interest rates higher for longer, and perhaps deliver some rate hikes later this year.

 

That remains supportive for the US dollar, particularly against currencies where domestic fundamentals are becoming less convincing.

 

Not much for US dollar until CPI release next week

 

With little fresh guidance from the minutes of the FOMC’s June meeting, attention now shifts to next week’s US CPI report and Fed Chair Kevin Warsh’s testimony before Congress. Both events have the potential to reshape expectations for the remainder of the year. Against a backdrop of firmer energy prices, the balance of risks arguably favours a more hawkish interpretation of incoming inflation data, which should continue to provide underlying support for the greenback. Today’s US jobless claims data pointed to a healthy jobs market.

 

GBP/USD forecast: Political uncertainty could cap sterling’s recovery

 

Sterling has been one of the stronger-performing major currencies in recent weeks, helped in part by the immediate reduction of uncertainty about Keir Starmer after he stepped down. But this doesn’t mean political uncertainty is over. Far from it. Attention is gradually shifting towards the expected change in UK leadership later this month. Investors will be watching closely for the appointment of the next Chancellor, particularly given growing speculation that fiscal policy could take a more expansionary direction.

 

The challenge for any incoming government is that public finances remain under considerable strain. With limited room for additional spending without raising taxes, expectations for meaningful fiscal stimulus may ultimately prove difficult to deliver.

 

At the same time, markets are no longer expecting the Bank of England to tighten policy further this year. That leaves sterling increasingly reliant on external factors, particularly oil prices and developments in the US dollar, rather than domestic monetary support.

 

Technical GBP/USD forecast: Cable reaches 200-day MA

 

 

From a technical analysis perspective, the GBP/USD forecast continues to favour the downside despite the impressive gains it has made in the last couple of weeks.  If we see a sharp reversal around the point of origin of the last breakdown from around the 1.3400 region, where we also have the 200-day average converging, resulting in the breakdown of the short-term bullish trend line, then a return to support at 1.3270ish could be on the way. Otherwise, a slow drift towards 1.3500 could be the outcome if oil falls back.

 

Looking ahead, a stronger-than-expected US inflation report next week could accelerate downside momentum by reinforcing expectations that the Federal Reserve will maintain a restrictive policy stance. Conversely, any easing in Middle East tensions or signs that inflation pressures are once again moderating could allow sterling to recover some lost ground. For now, however, the path of least resistance appears to favour a firmer dollar, leaving the near-term GBP/USD forecast tilted modestly to the downside.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R