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The Dollar can benefit from fading trade tensions.
The Pound to Dollar exchange rate (GBP/USD) retains a soft feel at the start of the new week in which we look for a move to 1.3364 to transpire.
The Dollar starts the new week bolstered by news of an EU-U.S. trade accord being struck on Sunday, which means Donald Trump is close to resetting global trade in America's favour, or so he hopes.
Regardless of the intricacies of the EU-U.S. deal, what matters is that the issue of trade will likely fall off the radar. For the Dollar, this is good news, given how much value it has shed owing to the uncertainties posed by the trade reset.
It's little wonder then that GBP/USD starts the new week softer at 1.3424, putting it exactly where we were one week ago.
Last week saw GBP/USD jump in the first half of the week, only to lose it all again in the second half, price action that we predicted might happen in last week's Week Ahead Forecast.
GBP/USD is fraying, and price action speaks of a pair that is struggling to rediscover its 2025 uptrend and Sterling is likely to be sold on rallies.
The chart shows momentum is soft: GBP/USD is below its nine-day exponential moving average (EMA) which keeps us bearish in the short-term timeframes. The Relative strength Index (RSI) - visible in the lower panel in the below chart - is pointing lower at a sub-50 reading of 42.83.
This puts us on course for 1.3364 in the near term.
Also be aware that month-end is upon us, which could result in some interesting behaviour in either direction, but we think the current pullback in GBP/USD can persist a while longer.
With trade likely to fade as a major issue, investors are free to focus on the Federal Reserve decision midweek and the non-farm payroll numbers due Friday.
The Fed is expected to keep interest rates unchanged, judging that inflation is still too high and the economy is robust enough to warrant a degree of patience.
"Inflation remains a key concern. Although recent CPI and PPI data came in below expectations, components of the core PCE deflator, the Fed’s preferred inflation gauge, suggest underlying price pressures persist. As a result, the Fed is expected to maintain its view that inflation is “somewhat elevated” and highlight a possibly more persistent inflation impact of tariffs," says Paolo Zanghieri, Senior Economist at Generali Investments.
Although a hold in July is likely, expectations remain that the Fed might cut rates at some point this year. This means the Fed's guidance on future rates will be of importance, and could well be where the FX reaction lies.
If the odds of such an outcome build, the Dollar might come under pressure, offering GBP/USD the chance to rally into August.
Again, it's worth emphasising that we don't see any rallies being significant at this juncture.
The payroll data due on Friday should indicate an ongoing slowdown in employment, which would be consistent with a rate cut at some point later this year.
The target is 102K jobs, and anything on either side will impact the market. U.S. labour market data has a habit of beating expectations, so another above-consensus print could boost the Dollar into the weekend.