The British pound started the week in a weaker stance, nearly reaching a seven-month low and bouncing back just a bit, which didn’t significantly alter its situation. Mr. Cable is now facing a dual challenge: a growing political void after Keir Starmer’s resignation and a backdrop of escalating global concerns, especially with tensions between the US and Iran heating up again. The week ahead looks busy for US data, enough to influence the dollar’s direction until Thursday, leaving the pound without much support.
A void where leadership once was
The pound has dealt with leadership gaps in Westminster in the past, often with unsatisfactory results. These transitions tend to open up questions of fiscal and policy uncertainty, quickly incorporated by the markets as currency risk premium. Starmer’s exit has sparked those questions again at a precarious time, especially as the gold market grows cautious about financial oversight. Until a new leader and a clear spending plan are introduced, the pound will likely face a political disadvantage, remaining susceptible to headlines about chaotic power struggles or delays in budget planning.
Two reasons for the dollar’s strength
On the global front, the pound is vying against the US dollar, but two factors have recently boosted the dollar’s dominance. First, there’s the geopolitical tension; with toughening rhetoric from both Washington and Iran, optimism for a ceasefire has dwindled, reversing the flow of safe-haven investments from the dollar. Second, from a financial standpoint, the Federal Reserve’s hold on interest rates at 3.75% last week, coupled with a hawkish outlook and a better inflation path, signals potential longer-term highs. This poses a challenge for the Bank of England, which is still expected to be the first among central banks to lower rates.
Short leash
The price pattern suggests a defensive approach. Cable dipped into the 1.3150 range last week, its lowest in seven months, but a gradual rebound this week has seen it hover around 1.3250, still shy of the important 1.3300 mark. The daily 50-period and 200-period exponential moving averages (EMAs) are converging around 1.3400, forming a barrier that needs to be breached for any genuine recovery to matter. The daily Stochastic Relative Strength Index (Stoch RSI) has recently ticked upward from lower levels, yet speculative positioning reflects a similar narrative, with recent data showing increasing net shorts in sterling.
This week’s pivotal moment
The economic calendar holds significant events. A double release of the Purchasing Managers’ Index (PMI) is scheduled for Tuesday, with preliminary figures for June coming from the UK at 8:30 am Japan time and from the US at 1:45 pm Japan time. While the UK’s services data, sitting right on the line between growth and contraction, is a crucial domestic indicator, a series of remarks from central bank officials from Tuesday to Wednesday may add to the risks stemming from the dovish side of the committee.
The major event kicks off Thursday at 12:30 GMT. At this point, we’ll get updates on the US core personal consumption expenditure price index (PCE) inflation rate along with the third estimate for first-quarter gross domestic product (GDP) and durable goods orders, likely resetting the Fed’s expectations, and thus impacting the dollar. Friday will feature the University of Michigan (UoM) sentiment survey and an update on speculative positioning.
Resistance: The immediate hurdle is at 1.3300, with a tougher barrier around 1.3400 where the daily moving average converges. A clear ascent past this level would suggest a serious shift in the downward trend.
Support: The 1.3150 region marks last week’s close call and serves as a new seven-month low, acting as the first line of defense. A daily close below that begins at 1.3100, with further risks reaching 1.3000.
Bias: Bearish, as long as cable remains under 1.3400. The current uptick may simply be a correction rather than a base. Given the intersecting factors of politics, positioning, and a hawkish Fed, a more plausible approach would be to sell on strength as it approaches the 1.3300 to 1.3400 range. A higher US core PCE on Thursday would likely lead to a retest of the lows.
