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The British pound could see downside pressures ease this week.
The pound to dollar exchange rate (GBP/USD) could see downside pressure ease this week as a recent 'blow out' loses steam, but a recovery to recent highs is highly unlikely.
Having surged to 1.3726 last week, it quickly lost altitude, declining to 1.3453 on Monday morning following three consecutive days of decline.
The Federal Reserve's interest rate cut appears to have been a catalyst for that 'blowout' top, with the market having sold dollars heavily into the event on the expectation that numerous cuts were to follow.
With the market already well positioned for rate cuts, the Fed needed to say something that would have encouraged these expectations further, which was always going to be a big ask in an economy that still faces notable inflationary pressures.
In the event, Fed Chair Powell described the decision as a "risk-management cut" and "moving in the direction of neutral," but "not at all" deserving speedier moves that are reserved for when policy is clearly "out of place."
A more sober appraisal of where the Fed is heading will have encouraged the repurchase of dollars.
The selloff in GBP/USD should fade from here, and on Monday, we are seeing a tentative recovery. A look at the chart shows GBP/USD has diverged too far from the nine-day EMA, meaning we would expect some mean reversion higher to allow the exchange rate to make contact with the EMA again.
A move to 1.3554 resistance therefore looks possible near-term.
Events to watch this week include the release of U.S. PMI data on Tuesday where we get an early insight into how the economy performed in September. Expectations for a composite PMI of 54.6 suggests investors anticipate solid growth for the month.
Thursday sees the release of GDP for the second quarter, while Friday sees the release of PCE inflation data, which is the Federal Reserve's measure of inflation.
Significant upside readings in either of these prints should give the dollar a fresh boost and further pressure GBP/USD and trigger a run down to 1.3365 support.
In the UK, we will watch the services PMI reading on Tuesday, where the expectation is for 53.6, which is consistent with a decent clip in the growth rate.
The rule of thumb, as always, is that anything above this would boost the currency, and anything below would weigh.
We will pay close attention to the sub-components of the report, particularly inflationary and employment subcomponents. They should tell us whether the labour market continues to deteriorate (which could encourage further rate cuts at the Bank of England) and whether inflationary pressures remain high (which should encourage a more cautious approach).
Last week's Bank of England decision saw rates left on hold, but the Bank did signal it was prepared to cut interest rates again. As a result, markets raised the odds of another cut happening before year-end, which weighed on the pound.
With this in mind, we will hear from Bank of England governor Andrew Bailey on Monday, as well as the Bank's Chief Economist Huw Pill (who also speaks again on Tuesday). Megan Greene speaks on Wednesday.