- The British Pound has reached a significant level against the US Dollar amid improving global investor sentiment.
- The GBP/USD exchange rate hit a new daily high of 1.3052 on Wednesday, its highest in over a month.
- This comes amid a continued recovery in the global stock market, which is focusing on growing expectations of interest rate cuts by the US Federal Reserve, pushing the broader US dollar to its lowest levels in seven months.
According to experts at Capital Economics: “The US dollar remains on the defensive as calm has quickly been restored in financial markets.”
The GBP/USD currency pair is particularly sensitive to global investor sentiment, tending to fall when markets are in “risk-off” mode and tending to rise when investor animal spirits are high. According to analysts, last week’s US economic data provided renewed support for a “soft landing” scenario, where the economy avoids a major and prolonged slowdown, aided by low inflation and low interest rates from central banks.
Commenting on the performance of the currency pair and the markets, Ruta Briskinet, Senior Forex Analyst at Convera, said: “The pound continues to benefit from the bearish outlook for the US dollar, especially given its strong performance this year. The pound is currently up around 2.0% year-to-date against the US dollar, making it the biggest winner among G10 currencies.”
Therefore, the immediate risk to GBP/USD is the Federal Reserve’s annual Jackson Hole conference in Kansas City, where Fed Chairman Powell is set to deliver a keynote speech on Friday. Analysts feel that while he may take a gloomy view on recent speculation of a 50bp rate cut in September, the overall message is likely to reassure market participants looking for confirmation that policy rate cuts are now imminent. As such, the USD may remain under pressure in the near term, although given how much the Fed has already discounted easing, we doubt there is further USD weakness ahead.
If this assessment holds true, GBP/USD could soon face resistance near its 2024 highs near 1.3130.
A more moderate market backdrop will be a key factor in determining the future performance of the pound, ensuring that any pullbacks are likely to be shallow. If the new calm persists, carry trade may re-emerge, and crucially, a return of carry trade would be supportive of the pound, as analysts believe this is the main driver behind its superior performance in 2024. Carry trade is where investors borrow in a low-interest-rate currency to invest in assets that carry higher interest rates, such as UK bonds. Consequently, this creates inflows that support the pound.
According to economists, US bond yields have weakened, and the dollar has retreated as traders bet that Powell will acknowledge a continued shift in the balance of risks facing the US economy, suggesting that the restrictive policy settings are no longer appropriate, and opening the door for an imminent easing decision. However, they do not believe that Jackson Hole will be the catalyst for the next phase of the rally. Analysts explain: "Fed Chair Powell is unlikely to put the Fed on a more aggressive easing path without sustained evidence of a turnaround in growth and employment, and investors may find themselves frustrated by the substance of his remarks."
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Technical forecasts for the GBP/USD pair today:
Based on the performance on the daily chart attached, the recent gains in the GBP/USD price are enough to push some technical indicators towards strong overbought levels. If the USD gains strong momentum from the announcement of the minutes of the last meeting of the US Federal Reserve today and the statements of the bank’s governor at the end of the week, the currency pair may be exposed to strong selling operations to take profits. Finally, we still prefer to sell the GBP/USD from every upward level and the closest resistance levels currently are 1.3085, 1.3120 and 1.3200 respectively.
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