GBP Bulls Eye Fresh Catalyst with UK Employment Data

Key points for the pound sterling:

Read more: GBP Breaking News: UK Economy Expanded 0.1% in Q1 2023 Bid to Buy GBP/USD

Bank of England meeting and the impact of UK GDP

The GBP sell-off continued after Thursday’s BoE meeting and gained momentum on Friday as GBPUSD dipped below the psychological 1.2500 level, trading at 1.2460 at the time of writing. Sell-offs in GBPUSD were more dollar-related than Sterling as evidenced by gains in GBP-EUR.

The BoE meeting offered some helpful advice, most notably central banks’ growth forecast upgrades. The Bank maintained its recent stance with vague forward guidance, crossing the line that further hikes could come if inflation shows greater signs of “holding”. Looking closely at the Bank of England’s outlook, the central bank expects inflation to fall well below its target over the next 24 months. Energy costs are seen as a major factor here and interestingly the outlook does not call for any further rate hikes, with the current rate of 4.5% seen as restrictive enough. However, like many central banks, the BoE is navigating in uncharted territory. The sell-off in sterling in the wake of the interest rate hike has brought back more dollar strength than sterling has weakened.

Friday morning brought UK GDP data and by all accounts, it paints a nice picture surface with Q1 GDP growth of 0.1%. However, on closer inspection, the February contraction and the March contraction do not bode well for the second quarter. Comments from the Office for National Statistics suggest that the March contraction was once due to bad weather as retail sales were affected as well.

Source: ONS

As much as market participants and commentators may be watching closely as Q2 GDP data start to filter, GDP will have little impact on the way forward for the BoE. No doubt the central bank will have all its focus on UK inflation and how that shapes for the rest of the second quarter.

Looking forward to next week

Looking ahead to next week, the focus will be on potential risks to the pound on the UK employment progress and especially the wages data. The Bank of England (BoE) made it clear this week that two sets of wages and inflation data will determine the path the central bank takes in June. With two policymakers already voting to keep rate hikes on hold (Dhingra and Tenreyro) wage growth is likely. There have been recent signs from the BoE Business Survey of possible moderation on this front, but let’s see what Tuesday’s reading holds. An upside surprise in wage growth could increase the odds of a rate hike as the pound turns into a buy bid while a decline could strengthen why market participants are expecting a pause from the BoE in June.

The general market sentiment remains fragile with the growing uncertainty surrounding the US debt ceiling adding to the pressure on the public mood. This may not have a direct impact on the pound, but the GBPUSD could face challenges from a USD perspective. Surprisingly, the US debt default situation has been supportive of the US dollar lately as markets have sought safe haven, with the Japanese Yen benefiting recently. This presents a downside risk for GBPUSD, with any developments on a default in the US or rising recession fears being felt across the markets.

UK economic calendar for the next week

After two massive event risk weeks, the UK economic calendar is set to enjoy a quiet week. Over the course of the week, there are only two data releases rated “High”, while we also have four data releases rated “Medium”.

Here are the two “highly rated” events for the coming week in the Eurozone’s economic calendar:

• On Tuesday, May 12th, we have the Employment Change data for February at 06:00 GMT.
• On Tuesday, May 12th, we also have the March Unemployment Rate due at 06:00 GMT.

For all the economic data and events that move the market, see DailyFX calendar

GBPUSD Final Thoughts and Technical Outlook

The GBP bulls seem to have run out of steam based on Thursday’s selling. Friday saw some buying pressure return as the RSI entered overbought territory. However, the biggest driver of this move was the resurgence of the dollar index and safe-haven demand.

Aware of the BoE’s positive announcement and the possibility of another rate hike, GBPUSD failed to breach the major resistance area around 1.2660. There is a high chance that next week will see range trading for GBPUSD between the 1.2450 support area and the recent high around the 1.2670 handle. GBPUSD is still bullish without a daily candle closing the swing low around 1.2460.

Key levels to watch out for

resistance levels:

Key support levels:

• 1.2450
• 1.2360 (50-day moving average)
• 1.2250 (100-day moving average)

GBPUSD D Chart, May 12, 2022

Source: TradingView, prepared by Zain Fouda

— Written by Zain Fouda L DailyFX.com

Connect with Zain and follow her on Twitter: @tweet