Cable made an attempt on the 1.30 zone late Friday and today (Monday), but both were rejected, albeit marginally so as the bounce is only around 50 pips. GBPUSD is also still trading under the falling trendline that so far keeps this latest bearish leg intact (see chart below).

Thus, the overall tone here remains bearish, even if GBPUSD remains above 1.30. A break below this 1.30 zone could possibly lead to a faster, steeper decline, which could see GBPUSD reach the next important support zone at 1.2850 – 1.28.

On the other hand, the bullish (rebound) scenario would be signaled by an upside break of that falling trendline. This could open the potential for a move higher, perhaps as a new retracement leg. In this case, 1.3150 would be the first resistance zone, ahead of 1.33, which would be the more important one to watch.

The dollar is pressing on the new highs for the cycle after breaking out of the 1-month range last week. Renewed hawkish rhetoric from the Fed, this time for faster quantitative tightening (QT), pushed the greenback higher. Fed Governor Lael Brainard firstly spoke in favor of a speedier and larger QT process than previously thought, but the same vibe was also evident in the Fed meeting minutes released Wednesday, where FOMC members discussed an “expeditious” tightening of monetary policy at their latest meeting in March. 

All of this is consistent with further US dollar strength going forward, albeit the trend of moderate but relatively steady gains may continue. The fact that other central banks also need to tighten policy because of rising inflation acts as a counterforce that moderates the USD’s gains. However, the hawkish Fed, coupled with a strong US economy in contrast to others and a general risk-averse mood in markets (amid the war in Ukraine and else), should continue to support the US dollar in the foreseeable future.

The highlights on the US economic calendar this week are the CPI inflation report (Tue) and retail sales (Thur). Headline inflation is forecasted to push further higher toward 8.5%, while the core CPI measure is seen around 6.5% y/y. But potentially, this could be the peak month as negative base effects will start to kick in from the next release in May. Still, 8.5% y/y CPI will be more than enough to keep the Fed firmly hawkish for the time before inflation starts to come down later this year.

In an uneventful past week, the pound continued to be driven by global factors and the longer-term domestic dynamics. It has remained within its established ranges in recent weeks, but the outlook is turning more negative amid the war in Ukraine and the fallout of economic relations with Russia. 

Like the euro, the pound is greatly affected by the energy crisis, hurting the domestic economy. Although GBP is understandingly faring slightly better as the UK is somewhat less dependent on Russia, the correlation between the pound and the euro is high (around 70%), and we can expect this to continue. This means that both currencies will be pushed around by the war, where negative developments should be bearish, while positive news from Ukraine can set the stage for a relief rally. Technical factors also seem to be helping the pound, with GBPUSD near that 1.30 psychological area (see more below). A break below could lead to a steeper and broader GBP decline.

The UK calendar is busier this week, with the focus on employment data (Tue) and CPI inflation (Wed). As in the US, inflation is expected to push higher while the jobs market should remain in a good state. Potentially any negative surprises in the employment data could be a catalyst that fuels a sharper GBP sell-off, while the market will likely look through any CPI figures as a lot of the high numbers are already well-expected and priced in.