Trade Of The Week: GBPUSD Major Breakout Imminent?

Fasten your seatbelts because this could be another rollercoaster week for the GBPUSD!

The mid-month UK data dump featuring wage growth and the latest inflation figures among other key reports could result in heightened volatility for Sterling. Across the Atlantic, it’s all about the Fed minutes that could offer clues on the central bank’s next monetary policy move.

With volatility likely to become the name of the game for the GBPUSD, a major breakout could be on the horizon.

Taking a quick peek at the technical picture, prices remain trapped within a range on the weekly charts with support at 1.2600 and resistance at 1.2850.

The lowdown…

The British Pound has appreciated against most G10 currencies since the start of August.

Sterling bulls continue to draw strength from growing bets around further BoE rate hikes, with the better-than-expected Q2 GDP data strengthening the rate hike argument.

Traders are currently pricing in an 87% probability of a 25-basis point hike in September’s policy meeting and a 50% chance of another hike by November.

This could be a big week for the GBPUSD and here are 4 reasons why:

   1. UK data dump

The incoming data could offer fresh insight into the health of the economy and influence expectations around the BoE’s next policy move.

• Tuesday, August 15: UK June unemployment report

The unemployment rate is expected to remain unchanged at 4.0% in Q2 from Q1. Annual wage growth (excluding bonuses) is forecast to rise to 7.4%, from 7.3%.

• Wednesday, August 15: UK July CPI

UK inflation is forecast to hit 6.7% year on year in July, down from 7.9% in June.

• Friday, August 18: UK July retail sales

UK retail sales excluding auto-fuel are forecast to slump -2.2% year-on-year in July compared to -0.9% in the precious month.

Potential GBP scenarios:

• The British Pound could appreciate if overall data prints better than expected and inflation figures exceed market forecasts – fuelling BoE hike bets.
• Should overall data disappoint, and UK inflation print below forecasts, this could drag the Pound lower as BoE hike bets cool.

   2. Fed minutes

The Fed minutes of the July 25-25 policy meeting could offer key clues on the central bank’s next policy move.

• Wednesday, August 16: FOMC meeting minutes

Taking a trip down memory lane, the Fed raised rates by 25 basis points last month and left the doors open to another hike in September. The minutes may help investors evaluate how keen the central bank is on another hike, despite traders only pricing in an 11% probability of such a move next month.

The dollar is likely to weaken if the minutes strike a dovish tone. Any hint of hawks or signal of more hikes down the road could boost the dollar.

   3. US economic data

When factoring in the Fed’s shift to data dependence, every US data point moving forward will act as a key piece in determining whether the Fed hikes rates one final time in 2023 or not.

• Tuesday, August 15: US July retail sales
• Wednesday, August 16: US July industrial production
• Thursday, August 17: US weekly initial jobless claims

Potential USD scenarios:

• A strong set of economic reports is likely to rekindle speculation around the Fed raising rates once again in 2023.
• Should overall data disappoint, this may strengthen the argument around the Fed being done with rate hikes in 2023, weakening the dollar as a result.

   4. Technical forces

After swinging within a 200-pip range since the start of August, the GBPUSD could be gearing up for a major breakout.

• A solid breakdown and daily close below 1.2600 could encourage a decline toward 1.2490 and 1.2380.
• Should prices push back above 1.2800, this may open the doors towards 1.3000 – a level not since July 2023.