GBP/USD retreats towards 1.1850, UK politics, wage increase and inflation eyed

• GBP/USD fades bounce off two-year low at the start of the key week.
• UK PM race signals Rishi Sunak, Liz Truss on top as final debates for the last two candidates continue.
• Britain up for increasing public sector workers’ wages by 5.0% to tame major strikes.
• Recession fears recently faded but UK data awaited for clear directions.

GBP/USD fails to extend the corrective pullback from a 28-month low as traders await the key political plays in the UK, not to forget headlines regarding inflation, employment and jobs report. That said, the Cable pair eases to 1.1867 during the initial hour of Monday’s Asian session.

GBP/USD also followed other major currency pairs as it cheered Friday’s US dollar pullback with hopes of a major increase in British public sector workers’ wages. However, cautious mood ahead of important data and decisive debate to determine the final candidates for the post of UK Prime Minister appears to have weighed on the quote of late.

That said, “Boris Johnson will next week offer pay rises averaging about 5 percent to millions of public sector workers, but ministers fear that below-inflation deals across the economy could trigger months of strikes,” said the Financial Times (FT). The news also adds, “The pay offer will be higher than originally proposed by government; ministers will argue it will help nurses, teachers and others cope with the cost of living crisis as inflation is expected to top 11 percent in the autumn.”

Elsewhere, Reuters said, “The five Conservative contenders still vying to be Britain's next prime minister clashed over tax cuts in a second televised debate on Sunday, with the two frontrunners - Rishi Sunak and Liz Truss - stepping up their battle on the economy.” It’s worth noting that UK’s ex-Chancellor Rishi Sunak gains major acceptance among Tories to be the next PM even if he resists tax cuts. On the other hand, Foreign minister Liz Truss has proposed, per Reuters, plans to axe increases in payroll tax and corporation tax at a cost of over 30 billion pounds ($36 billion) a year. “One candidate will be knocked out every day in the next three days, leaving a final two to face the verdict of Conservative Party members. They will vote for the winner who will be announced on Sept. 5,” adds Reuters.

It’s worth noting that softer US inflation expectations and mixed comments from the Fed policymakers appeared to have weighed on the US dollar the previous day. That said, US Retail Sales for June grew 1.0% MoM versus 0.8% expected and -0.1% prior (revised from -0.3%) whereas the University of Michigan's Consumer Confidence Index edged higher to 51.5 in July's flash estimate, versus 49.9 expected and 50.0 prior. However, the Index of Consumer Expectations declined to its lowest level since May 1980 at 47.3. Further, the US Industrial Production also contracted by 0.2% MoM in June while the New York Empire State Manufacturing Index rose to 11.1 versus -2.0 expected and -1.2 prior.

Talking about the Fedspeak, Atlanta Fed President Raphael Bostic said on Friday that June's 75 basis points rate hike was a "big move" and added that the Fed wants policy transition to be orderly, as reported by Reuters. On the other hand, San Francisco Fed President Mary Daly said on Friday that the "Fed is working on getting down inflation without stalling economy." Further, St. Louis Federal Reserve Bank President James Bullard sounded neutral as he said, per Reuters, on Friday that it wouldn't make too much of a difference to do a 100 basis points (bps) or a 75 bps rate hike at the next meeting.

It should be observed that US Treasury Secretary Janet Yellen mentioned during the weekend that a strong dollar reduces US competitiveness to some extent. It is part of the monetary policy mechanism.

Moving on, the key week starts with a light calendar but UK employment data, Consumer Price Index, Retail Sales and preliminary PMIs for July will be crucial economics to watch for fresh impulse. Also critical will be to watch the UK PM race and US PMIs for clear directions. Overall, GBP/USD is likely to be more volatile this week.

Also read: GBP/USD Weekly Forecast: A technical rebound could be in the offing

Technical analysis

A three-week-old resistance line challenges immediate GBP/USD recovery around 1.1865-70. Following that, June’s low of 1.1933 will be crucial for buyers to cross. On the contrary, a downside break of 1.1800 could recall sellers. That said, oversold RSI (14) conditions and impending bull cross of MACD tease a short-term rebound.