Cable Still Soft Ahead of UK, US Data

Upcoming economic data is expected to confirm the ongoing divergence between the US and UK economies as the pound regains some ground lost following the latest BOE policy meeting.

"Reasonable" to See a Dovish Reaction

The reference to rate cuts later this year being a "reasonable" expectation in the context of maintaining the current policy stance was interpreted by markets as a dovish signal. This contributed to short-term pound weakness. Currently, the market forecasts the first Fed rate cut in June, while the first cut by the BOE is projected in August. After initially declining, the Sterling has since recovered somewhat as traders seem to factor in more potential for the BOE to keep rates higher for longer.

However, confidence in the pound's recovery could be challenged upon releasing the finalised UK Q4 GDP data. Preliminary estimates showed the British economy contracted in the second half of last year, with growth of -0.2% in Q4 alone. While other major economies have recently seen revisions lift them out of technical recessions, significantly shifting the UK Q4 number would be difficult. With the potential for ongoing economic softness, the BOE may feel increased pressure to stimulate growth through monetary easing even if inflation does not fall precisely to the target.

The Growing Gap Across the Atlantic

The US is expected to report solid GDP growth of 3.2% for Q4 2023. This signals resilience in the American economy despite significant tightening by the Fed last year, suggesting it may face less pressure to ease policy than the BOE. As a result, this could offer more support for the greenback if the Fed postpones its expected interest rate cut until after June.

Another important indicator released on Friday will provide further insight into when US financial markets are closed for the Easter holiday. This refers to the Fed's preferred inflation gauge, the PCE price index. In February, the forecast calls for the annual core PCE inflation rate to moderate to 2.7% from the prior month's 2.8%, affirming an ongoing downward trend in price pressures over the past year. If in line with projections, the data would support the narrative that inflation is easing as expected and the Fed remains on track to adjust rates later this quarter.

Cable Remains Under Pressure

The decline of the British pound to 1.2575 against the US dollar triggered a short-term rebound. However, prices remain weak below 1.2668, 1.27, and the near-term high of 1.28. If downward pressure overcomes the local low, prices could potentially slide towards 1.25 prior to a more definitive movement. The likelihood of testing key support at the neckline of a potential heads-and-shoulder pattern is stronger in that region.

Source: SpreadEx / GBPUSD

Key Takeaways

Upcoming economic data in the US and UK are expected to confirm the ongoing divergence between the two economies. While UK GDP contracted in the second half of last year, and the economy may need continued stimulus, the US is projected to report solid GDP growth of 3.2% for Q4 2023, suggesting greater economic resilience and less pressure for the Fed to cut rates. However, another key inflation gauge, the US core PCE price index, is forecast to moderate further. This would support the Fed remaining on track to adjust rates later this quarter as inflation eases as expected.