The US dollar has started the new week trading mixed, rising to a fresh 2023 high against the Japanese yen but falling against the likes of the Aussie and pound, states Fawad Razaqzada of Trading Candles.
The dollar index closed higher last week, erasing a good chunk of the losses from the week before. On Friday, however, the dollar struggled to find further support following Thursday’s bullish reversal on the back of a soft 30-year Treasury auction and hawkish comments by Powell. The key question at the start of this week is whether those Powell-related gains will last or will the optimism seen in stock markets will sour the appeal of the dollar. This week, we will have some important economic data to look forward to, including CPI from both the UK and the US, which puts the GBP/USD outlook into focus.
Can the Dollar Hold Onto Recent Gains?
I don’t think the Fed Chair said anything out of the ordinary, although that’s not to say the dollar won’t necessarily rise further if incoming data continues to surprise to the upside. I mean, you wouldn’t expect Powell to turn decisively dovish just on the back of a couple of weaker data points. Equally, with inflation remaining above forecast for the past couple of months, he had to address the risks of it remaining elevated for longer, and the central bank’s readiness to act if required. Friday’s release of UoM Inflation Expectations data highlighted those risks. The fact that the index rose to 4.4% from 4.2% points to stickiness in CPI. However, the UoM’s consumer sentiment delivered a mixed overall picture, as it fell to 60.4 from 63.8.
GBP/USD Analysis: CPI and Retail Sales From Both UK and US Puts GBP/USD Into Focus
Friday’s stronger UK data dump offered a bit of support for the GBP/USD, which managed to close off its lows before climbing further higher at the start of this week, testing 1.2250 at the time of writing. We have more UK data to look forward to this week, including wages, CPI, and retail sales figures. In addition to the UK data, we also have key inflation and retail sales figures from the US, putting the GBP/USD into sharp focus.
Tuesday, November 14.
For two consecutive months, US inflation has risen to the upside. In September, annual CPI remained unchanged at 3.7%, defying market expectations of a slight decrease following an even larger surprise the month before. Perhaps this is why the Fed Chair was more cautious when he warned of tightening monetary policy further if needed, with his comments providing the dollar and bond yields fresh bullish momentum. However, if we see a surprisingly weaker CPI print this time, then it will boost the “peak interest rates” narrative again and potentially hurt the dollar.
Wednesday, November 15.
UK’s inflation rate has been very slow to come down, keeping policymakers at the BoE on their toes. While no further rate increases are likely, BoE Governor Andrew Bailey has said it is “too early to be talking about cutting rates”. Those talks could be pushed further out if CPI turns out to be stronger than expected.
This Week’s Other Key Data Highlights
The other key data on the economic calendar this week include UK wages and jobs data on Tuesday; US retail sales, PPI, and Empire State Manufacturing Index all on Wednesday, and US industrial production; jobless claims and Philly Fed Manufacturing Index on Thursday, and UK retail sales on Friday.
We will also have Australian employment data on Thursday, but more importantly, a Chinese data dump on Wednesday. As well as industrial production, we will have retail sales data to look forward to in the early hours of Wednesday from the world’s second-largest economy. Recent Chinese macro pointers have shown some improvement. We will need to see more evidence of a turnaround for yuan, local stocks, and some base metals prices to recover more meaningfully.
UK Economy Stagnates but Avoids Contractions
Last week official figures pointed to a stagnating UK economy, although one that performed better than hoped in the third quarter. While output failed to grow between July to September, this was still better than a drop of 0.1% economists had expected. A stronger performance in September meant the economy would avoid negative growth in Q3, with output rising by 0.2% on the month instead of zero expected. Construction output was a bright spot, which rose 0.4% month-on-month instead of falling by 0.5%, while industrial production was flat compared to a small fall expected.
Nevertheless, the Bank of England is not forecasting any speedy recovery in growth. High-interest rates to tackle stubborn inflation means mortgage payments are going to remain high and for some unaffordable, unfortunately leading to many delinquencies. The BoE thinks that the UK’s economic growth will be zero until 2025, albeit it is expected to avoid falling into a technical recession of two consecutive quarters of negative output.
GBP/USD Technical Analysis: Key Levels to Watch
The GBP/USD was testing a key support area between 1.2170 to 1.2225 at the time of writing. This is where the backside of a broken trend line meets the point of origin of the previous breakout and the 21-day exponential moving average. If the Bulls want to take charge, they must defend this area, otherwise, another drop to low 1.20s could be on the cards this week. On the upside, key resistance is seen around the 1.24 area where the previous recovery attempt last week failed. Here we also have the 200-day average coming into play.
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