The Pound Sterling (GBP) recently faced pressure near the critical resistance level of 1.3400 against the US Dollar (USD), but despite this correction, the long-term outlook remains optimistic for the British currency. This market movement came as the US Dollar showed signs of a mild recovery, yet its overall outlook remains vulnerable due to expectations of further rate cuts by the Federal Reserve (Fed).
In this blog, we will break down the recent movements in the GBP/USD pair, discuss the underlying economic factors impacting both the Pound and the Dollar, and explore the future outlook for both currencies.
1. The Pound Sterling’s Performance
On Wednesday, the GBP/USD pair corrected sharply from 1.3400 during the North American session. After approaching this crucial resistance level, the Pound began to lose ground as the US Dollar recovered from its yearly low. However, despite this minor setback, the outlook for the Pound Sterling remains strong.
The Bank of England (BoE) continues to shape the narrative surrounding the Pound's strength. Comments from BoE Governor Andrew Bailey confirmed that the central bank sees a gradual decline in interest rates as inflation begins to ease. This slow and steady approach has bolstered investor confidence in the British currency’s long-term prospects, even as it faces short-term corrections against the USD.
Bailey’s comments reinforced the notion that inflation in the UK is trending downwards, close to the BoE’s target of 2%. While there are still concerns about persistent inflation in the services sector, the overall picture suggests that the British economy is on track to achieve sustainable price stability. Policymakers, including BoE's Megan Greene, have expressed confidence in a cautious, gradual approach to rate cuts.
2. US Dollar’s Recovery and Vulnerability
The US Dollar, which had been struggling near its yearly low, managed a mild recovery during the same trading session. The US Dollar Index (DXY), which tracks the performance of the USD against six major currencies, climbed from 100.20. This upward movement came after the Federal Reserve’s recent policy decision to begin its rate-cutting cycle.
In September, the Fed implemented a 50-basis point (bps) cut, reducing borrowing costs to a range of 4.75%-5.00%, in a bid to support the labor market and ensure inflation returns to its 2% target. However, the broader outlook for the Dollar remains weak, with market participants expecting more cuts by the Fed.
According to the CME FedWatch tool, the probability of a further 75 bps cut before the end of 2024 has risen to 59%, up from 37% just a week ago. The market expects a 50 bps cut in November and a smaller 25 bps reduction by the year's end. The core Personal Consumption Expenditures Price Index (PCE), the Fed’s preferred inflation gauge, is also in focus, with economists expecting a slight uptick to 2.7% in August from 2.6% in July.
While the Dollar's short-term recovery provided a temporary setback for GBP/USD, the underlying expectations of aggressive monetary easing by the Fed make the US Dollar's future uncertain.
3. Economic Indicators and Their Impact on GBP/USD
As traders anticipate key data releases, the immediate focus is on the upcoming US core PCE inflation report, scheduled for Friday. This report will provide more clarity on the Fed's next steps. In the UK, policymakers are also closely watching inflation, particularly in the services sector, which remains stubbornly high.
The BoE’s inflation concerns, especially regarding the services sector, have led to increased scrutiny of the Service Consumer Price Index (CPI), which surged to 5.6% in August from 5.2% in July. While the headline inflation figure has remained near the BoE’s 2% target, this persistent services inflation has been a significant issue for monetary policymakers.
The differing inflation trajectories between the US and UK highlight the contrasting monetary policies of the Fed and BoE. While the BoE is confident about the downward path of inflation and gradual rate cuts, the Fed is expected to cut more aggressively, further weakening the Dollar's outlook.
4. Technical Analysis: Pound Sterling Faces Resistance
From a technical analysis perspective, the GBP/USD pair faced strong resistance at 1.3400, a key psychological level. This resistance has held firm, causing the Pound to lose ground. However, the long-term trend for the GBP/USD remains bullish, supported by a combination of positive economic indicators in the UK and the expectation of further easing by the Fed.
Support levels for the pair lie near 1.3300 and 1.3250, while a break above 1.3400 could open the door for more substantial gains toward 1.3500 in the coming weeks. Traders will be closely watching upcoming data releases and central bank commentary to gauge the pair's next move.
5. Future Outlook for GBP/USD
In the short term, the GBP/USD pair may continue to face resistance around the 1.3400 mark, particularly as traders react to US inflation data and the Fed's next policy moves. However, the Pound's overall outlook remains firm due to the BoE’s measured approach to interest rate cuts and the expectation that inflation will continue to decline in the UK.
The Fed's more aggressive stance on rate cuts could weaken the Dollar further, providing opportunities for the Pound to regain strength in the medium term. The divergence between the BoE's and Fed's policies will likely play a pivotal role in the direction of the GBP/USD pair.
In conclusion, while the Pound has corrected from 1.3400, the broader outlook remains optimistic for GBP/USD. With both central banks expected to continue adjusting their policies in the coming months, the pair is poised for further volatility. Traders should stay informed about key data releases and central bank communications to navigate these market movements effectively.
