GBP/USD analysis: Key levels to watch

The GBP/USD pair, known as "Cable," is eyeing a bullish breakout from converging trendlines on long-term charts, aiming to surpass the key resistance level around 1.2700. Given recent movements in other FX pairs and precious metals, such a breakout wouldn't be surprising, data permitting.

Potential for a Breakout

A clean break above the 1.2700 resistance could pave the way for a run towards the March high of 1.2893, with the psychologically significant 1.3000 handle coming into focus thereafter. On the downside, the critical support level to watch is 1.2595, the origin of last week's breakout.


Market Dynamics

The GBP/USD turned positive on Friday afternoon, alongside other major FX pairs, as the US dollar weakened. Additionally, silver prices saw a significant breakout, and other commodities rebounded after China introduced measures to revive its struggling property market, including easing mortgage regulations and encouraging local governments to purchase unsold homes.

Earlier on Friday, FX markets were calmer with the dollar extending its recovery from Thursday. Investors faced a quiet data day, which continued on Monday with most mainland European markets closed for a holiday.

Why We Are Bearish on the Dollar

Recent data indicate a slowdown in the US economy, making it challenging to maintain a bullish view on the dollar. On Thursday, jobless claims, industrial production, housing starts, and building permits all fell short of expectations. CPI missed forecasts with a +0.3% m/m reading, and retail sales were flat against an expected 0.4% increase. The Empire State Manufacturing Index also reported another below-forecast negative reading. Earlier, the April non-farm jobs report, the latest ISM surveys, and other indicators had all disappointed.

This suggests the US economic recovery is slowing, potentially lowering inflation and reducing the need for prolonged tight monetary policy. The Fed’s tapering of its balance sheet runoff further contributes to the bearish outlook for the dollar.

Key Events in the Week Ahead

Traders should monitor several macro events that could influence GBP/USD:

  • UK CPI Data (Wednesday): Recent UK data has shown surprising strength. If CPI falls more than the expected 2.7%, it could further support the pound.

  • UK Retail Sales (Friday): This data will provide additional direction for GBP/USD.

  • Global PMI Data (Thursday): Insights from Eurozone and UK services and manufacturing sectors will be crucial. A return to growth in manufacturing PMIs, even at a slower pace of contraction, would be positive news.

Outlook for the Rest of May

The key US data release to watch is the core PCE on the final day of the month, a week before the May jobs report. Until then, further dollar selling is expected but likely at a more gradual pace. Positive UK data and weaker US economic indicators support our bullish outlook for GBP/USD, anticipating a potential breakout above 1.2700 and targeting higher levels in the coming weeks.

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