The GBP/USD pair bounces off the 1.3300 neighborhood at the start of a new week, stalling Friday's modest pullback from its highest level since September 23. Spot prices, however, lack follow-through and currently trade around the 1.3330 region, unchanged for the day as the US Dollar (USD) selling seems to have abated.
The USD dropped to a two-week low on Friday, snapping a four-week winning streak, amid the recent sharp decline in US government bond yields from multi-year highs. Moreover, US Federal Reserve (Fed) Chair Kevin Warsh’s unwillingness to provide any signals on further policy moves led to a reduction in odds for policy tightening later this month and outweighed significantly hotter-than-expected inflation reports, which keep USD bulls on the back foot.
Market players, however, are still pricing in over a 90% chance that the US central bank will raise borrowing costs in December amid inflation risks stemming from rising energy prices. In fact, crude oil prices rallied to a nearly one-month high on Friday amid escalating Middle East tensions. Iran’s Islamic Revolutionary Guard Corps (IRGC) said on Sunday that an oil tanker caught fire and exploded after striking a naval mine in the Strait of Hormuz.
Furthermore, a secretary of Iran’s Supreme National Security Council, Mohsen Rezaei, warned that Tehran has prepared a new retaliation plan for any renewed US-Israeli attack. This keeps the geopolitical risk premium in play, lending some support to the safe-haven buck and capping the upside for the GBP/USD pair. That said, firming expectations of a 25 basis points (bps) Bank of England (BoE) rate hike in November should act as a tailwind for the British Pound (GBP).
The GBP/USD holds below the 100-day Simple Moving Average (SMA) at 1.3390 and the 50.0% Fibonacci retracement at 1.3406, which keeps the broader tone bearish despite the recent bounce. Immediate topside pressure is reinforced by the nearby 38.2% Fibo. retracement at 1.3343, suggesting that rallies are likely to struggle while spot prices remain capped beneath this dense resistance band.
On the downside, first support emerges at the 23.6% retracement at 1.3265, with a deeper floor at 1.3138, where the Fibonacci cycle low comes in.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.