- The British pound has struggled a bit during the trading session on Wednesday as the 1.35 level continues to be a bit of an issue for markets overall.
- This is an area that I think is going to continue to be consolidated around the 1.35 level with a bit of a range, perhaps extending all the way to 1.36 and all the way down to 1.34.
- The 1.35 level essentially becomes fair value.
The 1.3520 level is the immediate short-term resistance, but I think if we break above there, we still have a lot of problems above. The jobs number comes out on Friday, so I think that continues to be a bit of an issue as well. Thursday and Friday will probably be difficult sledding, so short-term back-and-forth trading is probably going to dominate.
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Interest Rates and Economic Headwinds
The fundamental analysis for this pair is that the Bank of England base rate sits at 3.75% while the Federal Reserve is in the 3.5% to 3.75% range. Markets are debating whether or not the Fed will cut again in late January. If the US data softens, that might have the Federal Reserve cutting more quickly and therefore sending the British pound higher.
The biggest problem is that the UK economy faces headwinds in and of itself. Rising insolvencies among zombie firms—unproductive companies that are kept alive by cheap debt—are forecast to spike the unemployment rate in 2026. This is a medium-term risk that could keep Sterling's gains somewhat muted.
The immediate catalyst will be the job numbers on Friday, so pay attention to that. Ultimately, this is a market that is still in a major decision zone, so short-term back-and-forth traders will probably be attracted to it.
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