- The US dollar has recently rebounded amid risk-off sentiment fuelled by geopolitical tensions, particularly in the Middle East, causing the GBP/USD currency pair to lose much of its recent gains.
- The pair has retreated to the support level of 1.3199 at the time of writing this analysis.
- Its gains until last week were the highest since February 2022, when it jumped to the brink of resistance at 1.3440.
According to Forex market trading, the US dollar is in demand at the beginning of the new month and the last quarter of 2024, helped by the latest guidance from Federal Reserve Chairman Jerome Powell on interest rates. Powell indicated on Monday that the Federal Reserve expects to implement two more US interest rate cuts by the end of 2024, which is less than what the market currently expects.
Prior to Powell’s comments, the market was pricing in as much as 70 basis points of rate cuts over the rest of the year, which would require at least another 50 basis points cut and another 25 basis points move. However, this new guidance from the Chair suggests that the markets will be better positioned with the expectation of two additional 25 basis point moves. In this regard, Francesco Pesole, a forex market analyst at ING Bank, said: "Powell explicitly rejected a 50-basis point rate cut by the end of the year."
Overall, financial markets have become more bullish in their belief that the Federal Reserve will rapidly cut US interest rates, which would boost the US economy, lower bond yields, and put downward pressure on the dollar. The analyst explains, "Powell said that the baseline scenario is two 25 basis point moves by the end of the year, which is an unusually specific guidance indicating his dissatisfaction with the market's hawkish pricing."
Analysts at Goldman Sachs say the US economy continues to produce “relatively strong activity data” and “recent Labor market news has been relatively encouraging.”
Because of this, Kamakshya Trivedi, a forex market analyst at Goldman Sachs, says, "The recent tendency to sell the dollar on all types of news seems unsustainable." However, Powell's message is not entirely clear-cut, and it's not unusual for markets to debate a 25-basis point rate cut given the broader evidence pointing to a larger interest rate cut in the coming months.
Given this, the comments are not a turnaround for the weakening US dollar and the path of least resistance for GBP/USD remains higher, albeit at a slower pace likely with deeper declines along the way. Overall, Friday’s US Labor market report will be important in this regard, as a higher-than-consensus reading will begin to give the impression that the Fed will have to go slow on rate cuts.
If this view becomes more entrenched, a period of GBP/USD weakness could follow.
Technical forecasts for the GPB/USD pair today:
Based on the performance on the daily chart below, GBP/USD has broken the support level of 1.3160, which is a clear break of the uptrend. As we mentioned before, stability below this level could prompt bears to move quickly to the psychological support level of 1.3000. Especially, if the US jobs numbers come out stronger than expected tomorrow Friday. On the other hand, and in the same time frame, the pair’s return to the resistance level of 1.3350 would be a strong impetus for further bull control again.
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