Market Predictions

The Pound Sterling (GBP) fell below 1.3330 against the US Dollar (USD) during the North American session on Friday. GBP/USD erased its earlier gains as the US Dollar strengthened after the release of US Consumer Sentiment and Inflation Expectations data. The US Dollar Index climbed to about 100.90, while the Flash Michigan Consumer Sentiment Index dropped to 50.8, its lowest level in nearly a year. Consumer Inflation Expectations for May rose to 7.3%, likely prompting the Federal Reserve to keep interest rates steady between 4.25% and 4.50%. Predictions suggest a 91.8% chance that rates will hold steady in June and a 61.4% likelihood for July. Earlier data on Producer Prices and Retail Sales, which were weaker than expected, had pressured the US Dollar. Retail Sales increased by just 0.1% in April compared to 1.5% in March, with a slight drop in auto sales. Initially, the Pound benefited from strong UK GDP data, indicating that the Bank of England may keep interest rates steady. However, concerns about persistent inflation still linger among BoE officials. Upcoming UK Consumer Price Index data will be key for market expectations regarding any future rate cuts. The GBP/USD pair suggests a positive outlook as it stays above the 20-day EMA. The RSI remains neutral, with important support around the 1.3000 level.

Market Movements

The Pound dropped below 1.3330 on Friday after a brief rise earlier, losing momentum once US sentiment data was released. What seemed like a moment of strength for the GBP quickly faded as the US Dollar gained strength due to ongoing inflation worries in America. The US Dollar Index edged up towards 100.90. Even though the consumer mood soured, with the Michigan Consumer Sentiment Index hitting a new yearly low at 50.8, inflation concerns took center stage. Despite the drop in sentiment, inflation expectations surged to 7.3%, a divergence that keeps the Federal Reserve focused on maintaining higher borrowing costs. Futures markets now show over 90% probability of steady rates in June and more than 60% for July. This has implications for USD positioning, limiting its downside and suggesting that any dips—especially those triggered by mixed data like Retail Sales and PPI—could quickly reverse when inflation signals strengthen. US Retail Sales only grew by 0.1% in April, a significant decline from March’s 1.5%, exacerbated by a drop in motor vehicle sales. This should have weighed more on the Dollar, but inflation concerns took precedence. In the UK, the Pound initially reacted positively to better-than-expected growth figures. These numbers supported the idea that the Bank of England may not hurry to cut interest rates. However, inflation anxieties linger among policymakers, and disagreements within the Monetary Policy Committee affect market perceptions regarding rate cuts. Next week’s Consumer Price Index data from the UK will play a crucial role in shaping rate expectations. Softer inflation figures could lead to earlier predictions of potential rate reductions, while persistent inflation would bolster the Pound, especially if US Treasury yields remain stable. Technically, GBP/USD shows signs of buyer interest around the 20-day moving average. The pair has not dropped significantly below this level, indicating there is still underlying demand. The Relative Strength Index is neutral, showing potential for movement in either direction without signaling overbought or oversold conditions. Key support is seen around 1.3000, where previous demand has formed. From a volatility perspective, upcoming CPI data and central bank comments are significant. Monitoring implied volatility on short-term GBP/USD options indicates that traders are not anticipating sudden shocks, though there are modest rises in short-dated wings, particularly in risk reversals favoring dollar strength below 1.3200. This is important, especially for short-dated options linked to tighter CPI ranges. We see this backdrop as an opportunity to cautiously explore topside exposure, provided risks are managed near support levels. Surprising inflation data could drive a reevaluation of strategy. We’ve seen instances where Sterling strength diminishes quickly due to renewed Dollar demand. Timing entries around key data releases without overextending positions will be a more effective strategy than relying solely on broad directional biases. Create your live VT Markets account and start trading now.

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