GBP/USD capped by sizeable resistanceAnalysts see risks of a retreatUK wages and inflation due for release

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The Pound to Dollar exchange rate has started 2024 in a positive fashion, but strong technical resistance and three major UK data releases suggest the prospect of a move lower over the coming days is elevated.

The Pound advanced against the Dollar last week, but the pair has struggled to meaningfully cross the 1.28 level, given sizeable resistance is located in the early 1.28s.

"It is well above 1.27 but is still unable to rally above 1.28," says Roberto Mialich, FX Strategist at UniCredit.

"GBPUSD has stabilised around the 1.27 level. With a lack of positive catalysts and strong resistance levels around 1.28–1.30, we think the pairing is likely to trade in a tight range with risks skewed to the downside," says Thomas Flury, FX Strategist at UBS.

Tanmay Purohit, a technical analyst at Société Générale, says Pound-Dollar has experienced a steady rebound after the breakout from a small base in November.

He says the move has stalled near a potential hurdle of 1.2820-1.2880, which represents the high of last August and the 76.4 Fibonacci retracement from July 2023.

Image courtesy of Societe Generale.

"Currently a pause is underway however recent pivot low near 1.2500 should be an important support near term," he says. "A break below this would be essential to confirm an extended down move." Over the medium-term horizon, Tanmay says the Pound-Dollar is expected to head higher gradually towards 1.2820-1.2880, and a move above this zone can lead to a persistent uptrend towards the July 2023 high of 1.3140.

Image courtesy of Societe Generale.

Pound Sterling enters the new week as 2024's best-performing currency, with the Dollar a close second.

Both the Dollar and Pound have benefited from a 'hawkish' repricing in central bank expectations, with investors lowering expectations for the scale of rate cuts that are likely to be delivered in 2024.

This has resulted from a run of resilient data from the U.S. and UK over recent weeks. On this front, it is the Pound that is in the spotlight over the coming days, given the busy data docket that must be navigated.

Tuesday sees the release of UK wage data, with the consensus prepared for a reading of 6.6% y/y in the three months to November.

When bonuses are included, the figure expected is 6.8%, with both representing a slowdown in wage growth from the previous reading.

Note that the ONS is not releasing a full employment report, which means the market focus is squarely on earnings. Expect investors to buy the Pound should earnings beat expectations, as this lowers the odds of an early rate cut at the Bank of England.

Wednesday sees the release of UK inflation numbers, with the consensus eyeing a reading of 3.8% y/y in December, down from 3.9%.

The core CPI reading is expected at 4.9%, down from 5.1%. Should the data beat expectations, the Pound can rally as markets lower bets for rate cuts.

Note that inflation has materially undershot expectations in the past two outings, and we would not be surprised if the Pound ends the midweek session lower on a repeat.

Friday sees the release of UK retail sales for December, with a 1.1% y/y expansion expected as the m/m figure prints at -0.5%.

A beat on expectation would signal the UK economy ended the year with momentum, which would support Sterling.

Turning to the Dollar, Wednesday sees the release of U.S. retail sales at 13:30 GMT, which should give an indication as to the strength of the consumer base, a crucial component of the U.S. inflation outlook.

The market looks for retail sales to rise 0.3% m/m in December, with any sizeable surprise likely to support the Dollar.

U.S. industrial production is due for release at 14:15, and the market looks for a print of 0% m/m in December; the market impact of this release is likely to be less pronounced than the retail sales release.

Thursday sees housing starts released at 13:30 GMT, with the market anticipating 1.45M starts m/m in December.

Also out at the same time is U.S. weekly jobless claims, where 207K claims are expected. This release tends to give a view on how the labour market is evolving.

The U.S. labour market has been steadily slowing but nevertheless remains robust and continues to frustrate Dollar bears looking for imminent Federal Reserve rate cuts.

The Dollar can remain supported on another strong print.