- The jump in the value of the pound sterling seen last week appears to have been a false dawn for those wanting a stronger exchange rate as the British currency returns to pressure amid a weak global market backdrop and increasing bets that the Bank of England will cut interest rates before long.
- The recent gains of the GBP/USD pair reached the 1.2428 resistance level, the highest resistance level for the currency pair in nearly two months, and from there it was exposed to selling operations that pushed it towards the 1.2241 support level before settling around the 1.2285 level at the beginning of Thursday’s trading.
Inflation in Focus
Recently, Bank of England Governor Andrew Bailey was in the spotlight midway through this week, telling delegates at a conference hosted by the Irish Central Bank that it was too early to start talking about interest rate cuts. Thus, the massage was another attempt by Bailey to resist the market's desire to advance expectations of an interest rate cut, a development that has been weighing on the pound since August. Bank of England Governor Bailey added that there is a need “to maintain interest rate policy to reduce inflation and it is too early to talk about lowering interest rates.” However, markets are looking at Bailey's comments, focusing instead on his comments that inflation is expected to come in "slightly lower" in this month's inflation report from the Office for National Statistics. Also, he said that the bank's policy settings were now restrictive, and that UK economic growth was "very weak".
Obviously, the weakness of the pound and weak UK bond yields suggest that the market is focusing more on comments about low inflation and a slowing economy, which are messages that there will be no need for further rate hikes and that the conditions for a rate cut are not far away. Bailey's comments follow those made by the bank's chief economist, Hugh Bell, who spoke publicly on Monday about the possibility of an interest rate cut. Moreover, Bell said that financial markets' bets on lowering interest rates by August 2024 are not "at all unreasonable."
Commenting on this, George Vesey, senior forex analyst at Convera, says: “This is a bit of a contrast to the Bank of England meeting last week, where officials confirmed that interest rates will remain high for a long time.” He added, “Traders took advantage of the cautious statements, and markets are now pricing in at least three interest rate cuts of 25 basis points in the bank’s key interest rate over the course of 2024.” “Yield spreads remain in favor of GBP/USD downside in the short term.”
Clearly, Sterling's weakness was also driven by a weak market backdrop, with stocks retreating from highs triggered by last week's US jobs report which indicated the US economy was slowing enough to prevent the Fed from raising interest rates again. Expectations of lower interest rates in the United States are supporting global stocks and risk-related assets such as the British pound.
Moreover, the market was unable to significantly follow last week's gains, which in turn contributed to the decline in the tone of the pound. Certainly, there was no decisive fundamental development or data release indicating that the rise that occurred last Friday after the US payrolls report should be ruled out, and what we could see is a reduction in those gains. If this is the case, risks could remain supported over the coming weeks, limiting any downside risks to sterling.
GBP/USD Outlook
We still prefer selling the GBP/USD currency pair against the US dollar from every rising level, as the US dollar is still the strongest against the rest of the other major currencies in light of investors’ demand for it as a safe haven, in addition to the improvement in US economic performance compared to Britain in light of the tightening process of banking policy centrality. According to the performance on the daily chart below, continuing the selling operations and pushing the GBP/USD towards the support level of 1.2150 will push the currency pair towards the psychological support level of 1.2000. On the other hand, over the same time period, the bulls moved towards the resistance 1.2440 again, which will push the currency pair to the most important peak, which is 1.2560, which confirms a strong breach of the general downward trend.
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