GBPUSD has seen a setback recentlyBut the uptrend is not yet invalidatedA massive week of data and central bank decisions awaits

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The Pound to Dollar exchange rate came under pressure last week as the impressive November rally failed and turned lower, but Pound Sterling's uptrend is by no means over, especially if UK data and central bank messaging fall in its favour.

For sure, this is a busy week for global currencies, and price action promises to be bumpy.

But we can't lose sight of the broader picture, which still favours further Pound-Dollar upside owing to technical setups and evolving expectations for central bank policy rates.

Tanmay Purohit, a technical analyst at Société Générale, says the pullback in Pound-Dollar "should remain shortlived".

"GBP/USD recently reached an interim hurdle of 1.2720, representing the 61.8% retracement from July. Test of this has led to a short-term downmove. The 200-DMA at 1.2460/1.2420 is next support," says Purohit.

The above chart shows the Pound-Dollar exchange rate at daily intervals and the failure of the rally at the 61.8% retracement level.

If Purohit is correct, the pullback will extend to the 200-day moving average at 1.2460/1.2420, denoted by the blue line.

This is an action-packed week regarding UK data, and the rule of thumb is that the Pound will likely rise if the actual figure comes in higher than the expected reading.

But we suspect the currency will experience a greater downside reaction to disappointments. This is simply because the Pound has risen strongly over the past two weeks, and the market has adjusted to a run of recent upside surprises in the data.

Tuesday sees the release of wage data, with average earnings (total pay) expected by the market to come in at 7.5% for October, down from 7.9% previously.

Average earnings (regular pay) are expected at 7.4%, down from 7.7% in September.

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Wednesday sees the release of UK GDP figures for October, where the consensus sees a figure of 0.2% month-on-month in October, up from -0.1% in September.

The rolling three month rate is expected at 0.3%, up from 0.1%.

Thursday sees the Bank of England interest rate decision and guidance update, please see below for more details on what to expect.

The week is rounded off with the S&P Global PMI release for December, which falls a week earlier than usual due to the impending Christmas holiday.

Manufacturing is expected to read at 47.5, services at 51.2 and the composite at 51.

The Bank of England: The Battle Continues

Above: File image of Governor Andrew Bailey. Photo by Zara Farrar / HM Treasury.

No rate change is expected, but the currency market reaction will rest on the tone of the guidance, particularly regarding the issue of potential rate cuts.

The Bank of England has been a source of support for Pound Sterling of late, as most policymakers have made it clear they are uncomfortable with the market raising expectations for interest rate cuts in 2024.

Heightened expectations for cuts act on real-time bond yields and thus lending rates, thereby easing financial conditions and risking the Bank's efforts in bringing inflation down.

"Markets are pricing three rate cuts in 2024 and we doubt the Bank will be too happy about that. Expect policymakers to reiterate that rates need to stay restrictive for some time," says James Smith, Developed Markets Economist at ING Bank

ING says to expect some "hawkish forward guidance", including the line on keeping rates restrictive for a prolonged period of time.

"To prevent financial conditions loosening further and to send a signal ahead of the new year pay round, the committee will likely double down on its 'high for longer' message," says Andrew Goodwin, Chief UK Economist at Oxford Economics.

But could the Bank be tempted to go further and formally say that markets have got it wrong in expecting three rate cuts?

If the Bank opts to do so via more strident wording in the statement, the Pound could advance.

"In terms of the risk to sterling market interest rates and the currency from the December BoE meeting, we tend to think it is too early for the Bank of England to condone easing expectations," says Chris Turner, Global Head of Markets at ING.

"This could mean that EUR/GBP continues to trade on the weak side into year-end - probably in the 0.8500-0.8600 range," says Turner.

Federal Reserve Could Underpin the Dollar Comeback

Above: Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

The highlight for the Dollar in the coming week is the Federal Reserve policy decision due midweek at 7PM GMT, where rates are expected to remain unchanged.

But the December meeting brings a fresh set of forecasts, which, combined with Chairman Jerome Powell's latest guidance, will move the markets.

"The appreciation of the USD over the last few days is likely to stay in place in view of the Fed meeting," says Dominic Schnider, a strategist at UBS.

"Investor expectations have shifted quite fast toward aggressive rate cuts next year, and the potential for disappointment—i.e., higher rates and renewed USD strength—should not be ignored," he adds.

Markets have brought forward expectations for Fed rate cuts to start around June, but these expectations were checked on Friday with an above-consensus U.S. labour market release.

A strong set of job and wage figures reminded markets the U.S. economy remains resilient and it is premature to expect rate cuts, which offered the Dollar a boost.

Ellie Henderson, an economist at Investec, says to keep an eye on the new projections for the Fed's interest rate levels.

She says the last time we received projections back in September (including the famous dot plot, which anonymously presents FOMC members' expectations on the path for rates) the median view on the committee was for the Fed funds target range to end this year at 5.50-5.75% i.e., one more hike.

"Considering the progress made on inflation and the slightly weaker economic data for the start of Q4 (such as retail sales), we do not expect this final hike of the year to occur. What will be of most interest though is the path thereafter, as markets and economists disagree over the potential pace of interest rate cuts next year," says Henderson.

Investec expects that the fears on the committee will be tilted towards the threat of an inflation resurgence rather than the fear of a deep downturn in the absence of faster rate reductions.

"As such, for the projections, we expect the FOMC to pencil in more rate cuts next year than was outlined in September but show restraint relative to market pricing," says Henderson.

From a currency market perspective, this would be supportive of the Dollar.