Bulls Eye $1.31 to Bring $1.3250 into View

Highlights

• The GBP to USD had a range-bound start to the Monday session.
• It is a quiet day on the UK economic calendar, with no UK economic indicators to move the dial until the CPI Report on Wednesday.
• However, second-quarter GDP numbers from China set the tone ahead of the US session.

It is a quiet day ahead for the GBP to USD. There are no UK economic indicators today to provide the GBP to USD with direction.

The lack of economic indicators will allow investors to consider the impact of hotter-than-expected wage growth and better-than-expected GDP numbers from last week on the BoE Monetary Policy Committee.

The shift in sentiment toward the Fed interest rate trajectory leaves policy divergence firmly in favor of the Pound. After the pickup in UK wage growth, the markets are betting on the BoE pushing interest rates beyond 6% before hitting the brakes compared with a peak Fed Funds Rate of 5.50%.

However, while monetary policy divergence favors the Pound, the UK remains at risk of a BoE-fueled recession. In contrast, the US looks set for a soft landing, with resilient labor market conditions and service sector activity delivering support.

With no economic indicators to consider, investors should monitor Bank of England chatter. However, no Monetary Policy Committee members are on the calendar to speak today, leaving commentary with the media to influence.

China Economy Sees Slow Growth

Earlier today, economic data from China set the tone.

The Chinese economy expanded by 0.8% in the second quarter and by 6.3% year-over-year. Economists forecast the Chinese economy to grow by 7.3% year-over-year but by just 0.5% in the second quarter.

Industrial production and fixed asset investment numbers were hotter than expected. Industrial production increased by 4.4% year-over-year in June versus 3.5% in May. Fixed asset investments were up 3.8% in June versus 4.0% in May. Economists forecast industrial production and fixed asset investment to increase by 2.7% and 3.5%, respectively.

However, retail sales numbers disappointed, rising by 3.1% in June versus a forecasted 3.2% increase. In May, retail sales were up 12.7% year-over-year.

The US Session

It is a quiet day on the US economic calendar. NY Empire State Manufacturing numbers for July will be in focus. However, barring a sharp decline, we do not expect the report to influence market risk sentiment.

According to the ISM survey, the US manufacturing sector contracted for the eighth consecutive month in June. The numbers from New York State would have to be particularly weak to draw interest.

While the economic calendar is on the light side, there are no FOMC member speeches to consider. The Fed went into the blackout period on July 15.

With no material stats or Fed chatter to consider, we don’t expect sentiment toward the Fed to shift after the surge in bets on an end to the Fed monetary policy tightening cycle.

According to the CME FedWatch Tool, the probability of a 25-basis point July Fed rate hike was 96.1% versus 93.0% one week earlier. Significantly, the chances of the Fed lifting rates to 5.75% in September stood at 15.4%, down from 24.2% one week earlier.

GBP to USD Price Action

Daily Chart

The Daily Chart showed the GBP to USD sat below the $1.3195 – $1.3255 resistance band. Looking at the EMAs, the GBP to USD remained above the 50-day ($1.26776) and 200-day ($1.23839) EMAs, signaling bullish momentum over the near and long term.

Notably, the 50-day EMA continued to pull away from the 200-day EMA and reflected a bullish trend.

Looking at the 14-Daily RSI, the 73.79 reading signaled overbought territory. However, the 50-day and 200-day EMAs signal bullish momentum. A GBP to USD move through the lower level of the $1.3195 – $1.3255 resistance band would support a run at $1.3250. The GBP to USD would need to avoid a fall to sub-$1.3050 to target $1.3250.

4-Hourly Chart

Looking at the 4-Hourly Chart, the GBP to USD sits below the $1.31 psychological resistance level. After the bearish Friday session, the GBP to USD remains below the $1.3195 – $1.3255 resistance band.

However, the GBP to USD remained above the 50-day ($1.29337) and 200-day ($1.27284) EMAs, sending bullish signals. Significantly, the 50-day EMA pulled further away from the 200-day EMA, signaling a run at the $1.3195 – $1.3255 resistance band to target $1.3250.

However, the GBP to USD must avoid sub-$1.3050 to support a sustained run at $1.32 to target $1.3250.

The 14-4H RSI reading of 80.16 signaled overbought territory, with buying pressure outweighing selling pressure. However, the EMAs send bullish signals, supporting a run at $1.3250.