Created on October 16, 2024

• Wage growth continued to slow, reaching a two-year low in the three months to August, signalling easing wage pressures in the economy.
• Inflation data and retail sales figures are also due this week and will provide further insights into price pressures and consumer strength.
• Meanwhile, investors are also looking ahead to the 2025 budget later this month for clarification on government policies and taxes. 
• In addition, the pound has been pressured by the general strength of the US dollar as the Federal Reserve is expected to cut borrowing costs at a slower pace than previously thought. 

The pound will come under pressure if UK service sector inflation falls below 5.2% on Wednesday. Ahead of the inflation figures, the GBP/USD exchange rate found support at a key support level of 1.3054 and is making a decent daily recovery. The gains come amid a rally in US stocks after some positive earnings from a number of big names on Wall Street, suggesting that the recent softening of expectations for a Fed rate cut is not a deterrent for bulls. As such, the natural reaction of the forex market when risk “rises” is to buy the dollar. However, for now, the GBP/USD rally is a counter-trend rally, and the risks remain tilted to the downside as it may be too early to call an end to the October sell-off. In this regard, analyst Robert Howard from Reuters confirmed this, who believes that the release of UK inflation data in the middle of the week poses a particular risk to the GBP/USD pair. 

He said in a note to clients: “The pound could extend lower towards 1.28 if the UK inflation data comes in cooler than expected on Wednesday, as this would increase the risk of the Bank of England cutting interest rates twice before Christmas.” 

According to the results of the economic calendar, UK inflation is expected to fall below 2.0% again, but this will be thanks to the decline in oil prices until September. Instead, the main driver of any reaction in the foreign exchange market will be the side on which services inflation falls at 5.2%. If inflation comes in below 5.2%, sterling could come under pressure against the US dollar GBP/USD. 

Furthermore, the data comes two weeks after Bank of England Governor Andrew Bailey surprised markets by saying that the bank may be more “active” when considering cutting interest rates. However, he qualified that any such shift would depend on the nature of inflation data. Now, Financial markets see a 50% chance of the bank cutting interest rates by 25bps in a row on November 7 and December 19. Rates will rise for December in the event of a weak set of data, which could pressure the pound. 

The analyst adds: “The GBP/USD pair, which was at 1.2800 in mid-August, fell to a one-month low of 1.3011 last Thursday – a week after Bailey’s dovish guidance, which hit the pound sterling hard.” 

According to the daily chart and ahead of the UK inflation figures, the GBP/USD rate continues its downward trajectory. As we mentioned before, the psychological support level of 1.3000 will remain a confirmation of the bears’ control and therefore prepare for stronger downside breakouts. After that, the next most important support levels will be 1.2920 and 1.2800 respectively. On the other hand, and in the same time frame, to exit this descending channel, bulls should move the currency pair towards the resistance levels of 1.3185 and 1.3230 respectively.

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