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Pound Sterling's rapid ascent against the Dollar is due a pause.
The Pound-to-Dollar exchange rate (GBPUSD) rose 2.66% last week, which is the biggest weekly advance since November 2022, amidst a widespread selloff in the Dollar.
The gain saw GBPUSD slice through the 200-day exponential moving average (EMA) at 1.2688 (see blue line in chart), which officially shifts the exchange rate from a downtrend into an uptrend, according to our Week Ahead Forecast rulebook.
Further upside is therefore preferred over the coming weeks.
However, the rally has been rapid and leaves GBP/USD overbought on a technical basis, and the prospect of a setback and consolidation in the coming hours and days is elevated.
"GBP/USD has benefited greatly from the broad USD-selloff across the board since the start of March to hit its highest level in almost three months. As a result, the pair has moved very close to our estimate of short-term FX fair value," says Valentin Marinov, chief FX strategist at Crédit Agricole.
On the daily chart, the Relative Strength Index (RSI) is at 71, which means it has breached 70, which is the level at which an exchange rate becomes overbought.
Above: GBPUSD at daily intervals with the RSI (lower panel) and Fibonacci retracement levels shown.
The RSI is mean-reverting by nature, meaning a slide below 70 is highly likely. For this to happen, GBPUSD must either consolidate or retreat.
Note, too, that the GBPUSD could also be inclined to consolidate at the 61.8% Fibonacci retracement of the September-January selloff, which is at 1.2926.
A look at the chart also shows how the previous major retracement lines (38.2% and 23.6%) attracted consolidative action.
Taken together, we are looking for a range to establish between 1.2874 and 1.2985 in the week ahead.
Turning to the data docket, U.S. CPI inflation for February will be the highlight of the coming week.
If the data undershoots expectations, investors will anticipate further rate cuts at the Federal Reserve in 2025. The market recently raised its expectations to three cuts for the year, whereas in early February, only one cut was expected.
This readjustment has provided the main impetus behind the Dollar's recent selloff. However, it will be hard to see this trend continuing if inflation data proves stuck at elevated levels.
Headline inflation is forecast to drop to 2.9% in February due to lower energy prices, partially offset by higher food prices. Core inflation is forecast to fall to 3.2%.
The potential for upside surprises is elevated, however. In January, both headline and core inflation increased compared to December. While some of this rise can be attributed to seasonal adjustment issues, persistent inflationary pressures also played a role.
Fears over looking tariffs and the general policy uncertainty surrounding Donald Trump also hint at upside surprises.
Tariffs are supposed to be an all-out positive for the Dollar, but last week, we saw this expectation upended as the Dollar fell in response to Trump's confirmation that tariffs would be placed on Canada and Mexico.
Trump will almost certainly stir the pot with further ad-hoc tariff announcements and threats in the coming days, but we wonder if these would be viewed as negative developments for the Dollar.
"Investors are clearly questioning whether the US economy is being steered by a sound financial strategy or by impulsive political manoeuvring. Markets thrive on stability and predictability—two qualities that are in short supply under an erratic approach to global trade," says Dr. Claudio Wewel, FX Strategist at J. Safra Sarasin.