Bulls are cautious amid overbought conditions, downside potential seems limited | 18 July 2024

Event to pay attention to today:

09:00 GMT+3. GBP - Claimant Count Change

GBPUSD:

On Wednesday, the GBP/USD pair reached new highs, testing chart territory above 1.3000. The prospect of a Federal Reserve (Fed) rate cut in September supported the US dollar and provided a boost to the pound sterling (GBP) in the midweek market session. The recent comments from the Federal Reserve have been perceived as dovish, with market participants interpreting the signals from the Fed officials as an acknowledgement of the progress made on inflation.

The betting markets are fully priced for a quarter-point rate cut when the Federal Open Market Committee (FOMC) meets on 18 September, with rates expected to remain unchanged at the end of the July meeting. The CME's FedWatch tool indicates a 98% probability of a September rate cut, with traders anticipating three rate cuts in 2024, compared to the Fed's more conservative outlook of one or two.

The final UK Consumer Price Index (CPI) inflation data, released early on Wednesday, came in within the expected range, offering little cause for concern among GBP traders. However, a sharper-than-forecast decline in the Producer Price Index (PPI) briefly exerted pressure on the Pound. The latest Producer Price Inflation figures show a decline of 0.3% on a month-on-month basis in June, down from the previous month's revised figure of 0.0%. This is in stark contrast to the forecasted rise to 0.1%.

While there is a growing consensus in the market that a rate cut is likely, comments from key policymakers have painted a less optimistic picture. Both Fed Governor Christopher Waller and Richmond FRB President Thomas Barkin observed that the labour market remains particularly robust despite the easing of inflationary pressures.

The release of UK labour market data on Thursday will provide a clear indication of the direction for the Pound Sterling in the second half of the trading week. The number of benefit claimants is forecast to fall sharply in June, from 50.4k to 23.4k month-on-month. Similarly, the quarterly annualised average earnings excluding bonuses is forecast to fall from 6.0% to 5.7%.

The UK retail sales data for Friday will complete the weekly data set for the United Kingdom. Analysts anticipate a decline in retail spending, with a projected contraction of -0.4% in June, down from a notable 2.9% surge in the previous month.

Trading recommendation: Trading predominantly Buy orders from the current price level.

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