Pound Drops 2.17% as US Dollar Surges on Strong Jobs Data

The British pound has experienced a significant decline in recent days, with the GBP/USD exchange rate dropping to a low of 1.3490, marking its lowest level since June 23. This decline represents a plunge of over 2.17% from its highest point this year. The drop in the pound's value coincides with a surge in the US Dollar Index (DXY), which rose to $97.86 on Friday, up sharply from the year-to-date low of $96.35. This increase in the DXY Index has been driven by a rebound in US bond yields, with the ten-year yield jumping to 4.417%, its highest level since June 20, and much higher than this month’s low of 4.20%.

The rally in the US dollar was sparked by strong jobs numbers released earlier this month, which showed that the economy created over 147k jobs in June, higher than 144k in the previous month. Notably, the unemployment rate dropped to 4.1% from 4.3% previously. Following these reports, the odds that the Federal Reserve would slash interest rates this month plummeted sharply. The next key catalyst for the GBP/USD exchange rate will be the upcoming Consumer Price Index (CPI) data on Wednesday. Economists expect the data to show that inflation rose modestly in June, with prices of goods and services, excluding food and energy, rising 0.3% in June, the biggest jump in five months. Analysts also expect the data to show that the core CPI jumped to 2.9% in June. A strong inflation report will lower the chances of the Federal Reserve slashing interest rates in September, as many analysts anticipate. The US will also publish the latest retail sales data on Thursday, which is expected to reveal that retail sales rose modestly during the month, providing more color on the second quarter economic growth.

The upcoming UK inflation data will also be a crucial catalyst for the GBP/USD exchange rate. Economists expect the report to show that the headline consumer price index (CPI) remained unchanged at 3.4%. The core consumer inflation report, which excludes the volatile food and energy prices, is also expected to have remained unchanged at 3.5% during the month. The UK will also publish the latest retail sales data, which will provide more information about the economy. Analysts expect that the Bank of England (BoE) may hold interest rates steady in the upcoming meeting if inflation continues rising. The GBP/USD pair has been in a strong bull run in the past few months, surging from a low of 1.2100 in January to a high of 1.3785 earlier this year. Most recently, the pair has formed an ascending channel and is now approaching its lower side. The pair has remained above the crucial support level at 1.3428, the upper side of the cup-and-handle pattern. Sterling remains above the 50-day and 100-day Exponential Moving Averages (EMA). Therefore, the GBP/USD pair will likely drop and retest the upper side of the cup and then resume the uptrend.

The GBP/USD exchange rate is facing significant volatility ahead of the upcoming UK and US inflation data releases. The Pound Sterling has been in a corrective phase against the US Dollar, with the GBP/USD pair correcting from near four-year highs of 1.3789. This correction was exacerbated by trade tariff jitters and the resurgence of safe-haven flows into the US Dollar. The US Dollar's strength was bolstered by announcements of new tariffs on various countries, causing market uncertainty and boosting the Greenback. Additionally, the Minutes of the Federal Reserve's July meeting indicated that only a few officials believed in the possibility of interest rate cuts as early as this month, with most favoring reductions later in the year. This hawkish stance further supported the USD. The UK economy also faced challenges, with a 0.1% month-on-month contraction in GDP for May, contrary to expectations of 0.1% growth. Industrial and Manufacturing Production also fell short of market expectations, adding to the Pound's woes. The GBP/USD pair reached a low of 1.3490, its lowest level since June 23, as a result of these economic disappointments and trade war concerns.

Looking ahead, the week promises to be eventful with key inflation data releases from both the UK and the US. The US Consumer Price Index (CPI) report on Tuesday will be crucial in shaping market expectations for Fed rate cuts. The UK CPI inflation data on Wednesday will also be closely watched, along with the UK labor data on Thursday. Additionally, speeches from Fed policymakers will provide further insights into the central bank's stance ahead of its July 29-30 monetary policy meeting. Technically, the GBP/USD pair breached the critical support level of 1.3643, paving the way for further bearishness. The 14-day Relative Strength Index (RSI) has moved below the midline, indicating potential for additional declines. However, immediate support is seen at the 50-day Simple Moving Average (SMA) at 1.3498, with a sustained move below this level required to initiate a fresh downtrend. On the upside, resistance is seen at the 21-day SMA of 1.3595, with further resistance at the 1.3750 psychological level. The upcoming inflation data will be pivotal in determining the direction of the GBP/USD pair. Higher-than-expected inflation readings could lead to interest rate hikes, potentially strengthening the respective currencies. Conversely, lower inflation could weaken the currencies as it may prompt central banks to maintain or lower interest rates. Traders will be closely monitoring these data releases and the accompanying market reactions to navigate the volatile landscape ahead.