GBP/USD faces resistance overhead on chartsCould struggle to extend recovery in short-termWithout any further corrective setback for USDU.S. PMI surveys, job data & Fed chatter eyed

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The Pound to Dollar exchange rate has staged a robust rebound from the depths of its mid-month lows but could struggle for further traction over the coming days as key U.S. economic reports garner the lion’s share of market attention in what will be a quiet period for the UK economic calendar.

Pound Sterling benefited last week from a continued broad-based retreat by the Dollar, which kept losses for GBP/USD shallow and short-lived even after the May S&P Global PMI surveys warned of tough times ahead for the UK’s breadwinning services sector.

The Sterling-Dollar rebound was buttressed by HM Treasury’s unveiling of a fiscal support package aimed at defending retired households, the unemployed and other welfare claimants from stratospherically elevated energy costs.

But with much of this aimed at claimants of "means tested" welfare it's possible, if not likely that eligibility also awareness issues will either exclude or simply many of the lowest income workers from accessing this support, potentially keeping alive risks for the economy and Pound later in the year.

These would be medium-term headwinds, however, while in the week ahead other factors will likely be dominant for the Pound-Dollar rate.

“The latest weakness in the US data has triggered recession fears, with the market repricing the Fed and risk assets rallying as a result. However, we believe that the market has overreacted,” says Athanasios Vamvakidis, head of G10 FX strategy at BofA Global Research.

Above: Pound to Dollar rate at daily intervals with Fibonacci retracements of May rebound indicating possible areas of technical support for Sterling and resistance for the Dollar. Shown alongside spread - or gap - between 02-year UK and U.S. government bond yields. Click image for closer inspection.

“We expect data to also start weakening in the rest of the world in the months ahead. US and the UK data started weakening first, as these are the two major central banks that have already started hiking rates,” Vamvakidis and colleagues said on Friday when reiterating a bullish view on the Dollar.

It’s unclear if U.S. factors like ebbing market expectations for Federal Reserve (Fed) interest rates and other recent international drivers, such as the increasingly broad easing of coronavirus containment measures in China, will remain supportive of the Pound and other currencies over the coming days.

“The FOMC minutes this week and Fed official comments suggesting a reassessment of the policy stance after two further 50bp rate increases will likely act to cap yields for now,” says Lee Hardman, a currency analyst at MUFG, who's warned the Dollar could be vulnerable to a further corrective setback.

Last week the Dollar softened amid signs that significant parts of China’s economy may be emerging from a coronavirus-induced hibernation and after some U.S. economic data including figures relating to the services sector, housing market and business investment pointed to a softening economy.

The U.S. data encouraged speculation about a possible slowdown in the pace at which the Fed is likely to lift its interest rate later this year, speculation that was somewhat vindicated by minutes of the bank’s May meeting.

Above: U.S. Dollar Index at weekly intervals with Fibonacci retracements of June 2021 rally indicating possible areas of technical support. Click image for closer inspection.

The minutes suggested that some Fed policymakers could be open to the idea of a pause in the ‘tightening cycle’ if they receive “clear and convincing evidence” of U.S. inflation being in retreat back to the bank's 2% target.

“The increase in the core deflator meant that the year-over-year rate fell to 4.9% from 5.2%, the second straight decline. More importantly, the rate of increase in the three months to April, compared to the previous three months, slowed to 4.2%,” says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

“Our base case is that the Q4 core PCE inflation rate will be 3.9%, close to the Fed’s March forecast, 4.1%. Next year, though, we expect inflation to fall much more quickly than the Fed,” Shepherdson says of last Friday’s reading of the Core PCE Price Index, the Fed’s preferred inflation gauge.

U.S. inflation data is still some way off from having provided the “clear and convincing evidence” that is a prerequisite for any decision by the Fed to slow or pause its monetary tightening cycle, although this hasn't stopped the market from marking down slightly its expectations for U.S. interest rates.

April’s Core PCE Price Index provided a further indication last Friday that inflation pressures may be cooling and this is the context in which the market may be likely to assess the week ahead's U.S. economic figures.

Above: Pound to Dollar rate at daily intervals with Fibonacci retracements of February decline and various extensions thereof indicating likely areas of technical resistance for Sterling and support for the Dollar. Click image for closer inspection.

"When ‘Top Gun’ came out in May 1986, the PCE deflator was 2.0% y-o-y: Friday’s was 6.3%. Fed Funds was at 6.75%: Friday’s was 1.0%. There looks to be a lot more firepower required yet, sorry," cautions Michael Every, a global strategist at Rabobank.

This week's data releases include the latest Institute for Supply Management (ISM) PMI surveys and the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey (JOLTS) on Wednesday, which come ahead of Friday’s non-farm payrolls report for the month of May.

Should this data indicate a deteriorating economic outlook, it's possible it will encourage perceptions of the Fed being on course to tame U.S. inflation pressures by having sapped demand from the economy through its interest rate policy.

“GBP/USD can lift modestly this week because of USD weakness. There are no important UK economic data or policy relevant speeches from Bank of England officials,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

"GBP is likely to be driven by the global economic outlook and the trend in the USD. GBP/USD faces resistance at 1.2775. This level could be tested," Capurso and colleagues said on Monday.