The exchange rate of the British Pound against the US Dollar GBP/USD is on a short-term upward trend that may extend in the coming days, provided that global market sentiments remain stable, and the upcoming US inflation report on Thursday proves to be a major market driver. According to trading, the GBP/USD pair rebounded towards the resistance level of 1.2767 at the beginning of this week, after facing selling pressure at the end of last week due to stronger-than-expected US job numbers, extending the currency pair to the support level of 1.2611.
The stability of the British Pound sterling's price is distinctive among Forex market currencies, and it performed well given the rise of the US Dollar against all its G10 counterparts. The Pound Sterling competes with the US Dollar for the title of the best-performing major currency in the first week of 2024, thanks to a decline in market bets on the range of interest rate cuts expected from the Bank of England in the coming months.
Market bets on the US Federal Reserve's interest rate cuts were reduced after the strong US jobs report, prompting the market to bet that the Bank of England would follow the US Federal Reserve's lead. The Pound Sterling was also boosted by the strong upgrade last week of December's Purchasing Managers' Index data, indicating that the economy has returned to the growth zone at the beginning of the year, reducing the need for immediate interest rate cuts from the Bank of England.
Technically, the GBP/USD exchange rate is comfortably above the 200-day moving average, confirming that it is on a short-term upward trend that could extend in the near term, with the possibility of reaching its highest level in December at 1.28. Commenting on the performance of Sterling/Dollar, Boris Kovacevic, an expert at Convera, says, "The GBP/USD pair is now trading just above 1.27 US Dollars, and it has been on an upward trend since November."
Naturally, the struggle for dominance between the Dollar and the Pound Sterling is likely to limit the range of movements in both the upward and downward directions, which could frustrate those looking for a stronger Pound. We note that the Pound Sterling is also approaching a major resistance area represented by the 200-week moving average, currently at 1.2835, which could prevent further upward movement. As it appears, the pair's progress was recently thwarted at this level in late December. Furthermore, the 200-week moving average helps explain the long-term decline in the Pound Sterling, and we expect a higher breakout to be challenging for bulls.
Overall, this week's fundamental price movement will depend on the results of the US inflation, scheduled for release on Thursday at 13:30 GMT. The market expects a 3.2% annual rate in December, up from 3.1% in November, driven by a 0.2% monthly increase. The core inflation rate is expected to reach 3.8% annually, down from 4.0%. The general rule is that if inflation exceeds these expectations, the Dollar will decline, and the market reaction will be clearer the more the deviation. Commenting on the event and its potential impact, Edward Bell, an analyst at Emirates NBD, says, "Overall, we do not expect labor market data to be the main determinant of the US Federal Reserve's policy in the coming months, and this week's release of the US Consumer Price Index will be much more important."
However, the strong US jobs report released last Friday was a reminder that the US economy is still capable of delivering readings higher than consensus; therefore, the strength of the Dollar may be on the agenda again this week. The US labor market added more jobs than expected in December, with non-farm payrolls increasing by 216,000 compared to market expectations of 175,000.
On another note, the release of Gross Domestic Product figures on Friday will be the highlight data in the UK, but comments by Bank of England Governor Andrew Bailey on Wednesday could move the currency market. Governor Bailey will appear before a Treasury Select Committee hearing regarding the December Financial Stability Report at 2.15 pm GMT. The Financial Stability Report is not directly related to monetary policy, but there is a possibility that Bailey will be questioned about interest rates, which could provide some clues as to whether the governor maintains his firm view that it is too early to think about cutting interest rates.
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