The GBP/USD currency pair is stuck in a sideways trend. Since mid-December last year, the pair has been trading within the price corridor of 1.2610 – 1.2780, that is, between the lower and upper boundaries of the Bollinger Bands indicator on the daily chart. The range is wide enough, giving traders "room to maneuver."
However, if we look at the weekly timeframe for GBP/USD, we see almost a continuous line—buyers and sellers alternately seize the initiative, but the pair is essentially marking time. After all, for the development of a downward trend, bears need at least to consolidate below the target of 1.2570 (the upper boundary of the Kumo cloud on D1), while for the development of an upward movement, a break into the 28th figure is necessary. But traders are showing indecision, locking in profits as they approach the lower/upper boundary of the range.
This is partly due to the uncertain behavior of the American currency. The U.S. Dollar Index showed an upward dynamic at the beginning of this year amid weakening dovish expectations regarding the further actions of the Federal Reserve, but then the upward impulse faded. The greenback also got stuck in a sideways trend, waiting for the next piece of significant news. In this context, the next few days will be crucial for the American currency. On Thursday, key data on U.S. GDP growth will be published, and on Friday, the core PCE index, the most important inflation indicator for the Fed, is expected. If these reports, so to speak, "resonate," the dollar may either significantly strengthen its positions or, conversely, come under pressure again.
According to most experts, the American economy grew by only 2.0% in the fourth quarter of last year, after a 4.9% increase in the third quarter. As for the core PCE index, a decline to 3.0% annually is expected—this is the lowest value of the indicator since March 2021. If both indicators end up in the "red zone," the likelihood of an interest rate cut at the Fed's March meeting will increase again, and the dollar will accordingly weaken across the market.
However, an alternative scenario is also possible, in which the personal consumption expenditures index in December accelerates (after four months of consecutive decline), and the U.S. GDP in the fourth quarter exceeds the consensus forecast. In such a case, the hawks of the Fed will be reinvigorated, and the likelihood of a policy easing in March will decrease to 25-20% (as of today, this probability is 42%, according to the CME FedWatch Tool).
Considering such an event fork, the caution of GBP/USD traders seems quite justified. Especially since the British currency is also awaiting its "test." On February 1, the first meeting of the Bank of England this year will take place. According to the overwhelming majority of analysts, the regulator will maintain the status quo following this meeting. For example, all 70 economists surveyed by Reuters expressed confidence that the central bank will leave the base rate unchanged at 5.25%. There is no intrigue here.
But there remains intrigue regarding the future actions of the English regulator. For example, nearly half – 38 out of 70 – of the surveyed economists suggested that the first interest rate cut will occur in the second quarter of this year. The rest believe that the Bank of England will remain on "stable ground," as Andrew Bailey put it, until the middle of summer or even autumn. Analysts at JP Morgan also forecast the same, estimating that the central bank's first step towards easing monetary policy will be in August this year. Here, there truly is intrigue, as the latest inflation report does not favor a dovish sentiment.
Recall that the overall Consumer Price Index (CPI) in the UK in December was 0.4%, against a forecast growth of 0.2% (the strongest result since September last year). In annual terms, the overall CPI also ended up in the "green zone," rising to 4.0% (against a forecast decline to 3.8%). The core Consumer Price Index remained at the November level (5.1%), whereas most analysts expected it to be at 4.9%. The Retail Price Index (which is used by British employers when discussing the "salary question") grew in monthly terms to 0.5% (forecast is 0.4%), and annually to 5.2% (forecast is 5.1%). How the Bank of England interprets this release is an open question.
Thus, the pound and the greenback are in anticipation of important tests. In such conditions, discussing the prospects of developing a downward/upward scenario is not applicable. For example, the dollar might react positively to the dynamics of growth in the American economy, but the next day be under strong pressure if the core PCE index turns out to be below the three percent mark. The pound will follow the greenback throughout these days, while next week, the tone of the trades will be set by the Federal Reserve and the Bank of England (the Fed will summarize the results of the January meeting on the 31st, and the English regulator on the next day).
Given the importance of the upcoming events this week, the pair is likely to trade within the established range, that is, in the corridor of 1.2610 – 1.2780. If the American reports turn out to be unfavorable for the greenback, buyers will rise to the upper boundary (and possibly even test the 28th figure). In the opposite case, the price may drop to the base of the 26th figure, and perhaps test the 25th price level. But in terms of the development of a downward/upward scenario, the "arbiters" will be the central banks, which will announce their verdicts next week. At this moment, it is sensible for the pair to maintain a waiting position: both buying and selling GBP/USD are unreliable.