GBP/USD could find feet near 1.21 short-term Speculative market risk reduction may support U.S. PCE data eyed as UK calendar quietens

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The Pound to Dollar exchange rate toppled from six-month highs last week as deteriorating economic data and hawkish central banks drove a rout in risky assets but Pound Sterling could benefit this week if the forthcoming holiday period leads the speculative market to lighten up on its own risk for a while.

Sterling gave up much of this month's gain over the Dollar last week when riskier currencies came under pressure alongside stock and bond markets following unambiguously hawkish messages from the Federal Reserve (Fed) and European Central Bank (ECB) in the latter half.

Each warned that financial markets are likely underestimating the extent to which interest rates are set to rise up ahead, boosting the Dollar and Euro just as Sterling was penalised for division on the Bank of England (BoE) Monetary Policy Committee where two members voted to leave Bank Rate unchanged.

"Cable is now trading near the 200-day MA, now at 1.2101. A drop through there and the 1.190 Nov 30 low would bolster the view for a mature rally," says Jason Hunter, a technical strategist at J.P. Morgan, in reference to GBP/USD.

"An important cluster of short-term support sits at 1.1640- 1.1740," he adds while writing in review of the U.S. Dollar charts.

Above: Pound to Dollar rate shown at daily intervals with selected moving-averages and Fibonacci retracements of September and October rallies indicating possible areas of technical support for Sterling. Click image for closer inspection.

Hawkish policy messages from the Fed and ECB weighed on risky assets and the Pound-Dollar rate just as a flurry of official figures warned of deteriorating economic conditions in the U.S. and UK with retail sales numbers for November and manufacturing PMI surveys for December included.

"Overall, the best-case scenario is that GDP will be flat in Q4. But there's a good chance we see a second consecutive q/q fall, particularly given the potential impact of widespread strike disruption in December," says Andrew Goodwin, chief UK economist at Oxford Economics.

"Prospects for 2023 will be heavily shaped by how quickly inflation drops back. CPI inflation cooled to 10.7% in November, from 11.1% in October, beginning what's likely to prove a slow descent back to more normal rates," Goodwin writes in a Friday research briefing.

All of this acted as an open invitation for further risk-averse positioning in the speculative market last week but with the Christmas holiday period approaching in the western hemisphere, positioning dynamics could be about to turn more supportive of Sterling in the days ahead.

This is largely because the Pound has been one of the speculative market's most popular 'short' trades throughout the year and so would potentially benefit from any profit-taking or book-squaring carried out in order to reduce risk going into the festive period and new year.

"Liquidity is likely to thin during the holiday period. Currency moves can be large when liquidity is low," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

Above: Pound to Dollar rate shown at daily intervals with Fibonacci retracements of January 2022 and June 2021 declines indicating possible areas of technical resistance for Sterling. Selected moving-averages denote possible support. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

"GBP/USD can consolidate in the week ahead after taking a step down this week. There are no important economic data in the week ahead. GBP/USD can take its cue from trends in the USD," Capurso says.

With trading activity likely to be low over the coming days, there is the possibility of only a limited response to this week's offering from the U.S. economic calendar, which includes the latest reading of the Personal Consumption Expenditures (PCE) inflation gauges on Friday.

These are the Fed's preferred measure of inflation and economists will be looking to see them confirm the declines seen in the last two readings of the official consumer price indices.

"We think the Fed underestimates the extent of the disinflationary forces already at work," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

"We think progress on core inflation will come more quickly than both markets and the Fed expect, creating the space for a significant shift in the Fed’s messaging by the March meeting. When the data shift convincingly the Fed will change tack," he writes in a Monday research briefing.

Above: Pound to Dollar rate shown at weekly intervals with selected moving-averages and Fibonacci retracements of January 2022 and June 2021 declines indicating possible areas of technical resistance for Sterling. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.