- The Pound Sterling reached a two-year high against the US Dollar amid a renewed rise in global equity markets, with one market expert saying that any weakness would only invite more buying interest.
- According to reliable trading platforms, the GBP/USD currency pair rose to the resistance level of 1.3265, its highest in two years.
- Its gains came with European equity markets outperforming and traders continuing to play on the theme of divergent monetary policy between the US and the UK.
Overall, US equity markets seem poised to start the day on a decline, but German and British markets are recovering and rising by about half a percent each. Obviously, that’s indicating demand for European assets that is helping the Pound Sterling. Commenting on this, a note from the JPMorgan forex trading desk states: "Despite all my doubts, the Pound Sterling continues to trade like a rock star as we easily exit the triple top at 1.3145 after Jerome Powell's comments."
According to forex market trading, the GBP/USD rose last Friday after Powell showed a clear intention to cut US interest rates in September, as financial markets were surprised by the extent of his commitment to this move. Previously, the Federal Reserve had insisted that it would move cautiously on cutting US interest rates, but Powell's speech seemed like a "pause" moment.
In fact, financial markets have seen good odds that the Federal Reserve will start the cut cycle with a large 50 basis point hike, which was still seen as an unlikely scenario before his speech. Consequently, the result is a selling of the US dollar that extends into Tuesday and takes the GBP/USD pair to a new high for 2024 at 1.3260.
According to technical analysis, there is not much on the upside for the GBP/USD pair in terms of levels, except for a secondary pivot zone at 1.3275/00. Also, we struggle to reinvest meaningfully in the Pound Sterling here, and we acknowledge that declines towards the 1.3145 pivot should be bought in the coming sessions.
The Pound Sterling is also supported by Bank of England Governor Andrew Bailey's speech last Friday, in which he said it is too early to say that the battle against inflation is over, indicating that the bank will not be in a hurry to cut interest rates again. According to analysts, Bailey seems relatively comfortable about inflation, and we have seen the first decline in the BRC in nearly three years, but falling prices are treated as a boon for the currency.
The British Retail Consortium (BRC) said its measure of shop price changes showed prices fell by 0.3% in August, down from +0.2% in July. Moreover, this is below the three-month average of 0.0%, and annual shop price growth remained at its lowest level since October 2021. UK inflation has been falling since 2023, but this means that the pace of increase has only been slowing. Furthermore, the outright falls in prices offer relief to shoppers as the absolute level of goods resulting from a period of abnormal inflation can begin to fall and boost purchasing power.
On the other hand, the yield on 10-year UK bonds is falling. According to electronic trading, the yield on 10-year UK bonds has fallen to 3.95% as investors expect lower interest rates. Earlier in August, the Bank of England cut its benchmark interest rate by 25 basis points to 5%, with markets expecting further cuts of 41 basis points by the end of the year. However, better-than-expected UK economic data and cautious comments from Bank of England Governor Andrew Bailey about further rate cuts have tempered these expectations.
Meanwhile, British Prime Minister Keir Starmer has highlighted the long road ahead to address the issues he attributes to the previous Conservative government, warning that conditions could worsen before they improve. In the United States, weak economic data and comments by Federal Reserve Chairman Jerome Powell have fuelled speculation of future interest rate cuts by the Fed.
On the stock trading platforms front, British stocks paused after four days of gains. According to trading, the FTSE 100 index fluctuated between small gains and losses on Wednesday after four days of gains, as investors exercised caution ahead of Nvidia's quarterly results, which could impact the AI-driven global stock rally. Among individual stocks, Kingfisher shares fell 2% after Citigroup downgraded it to "neutral" from "buy." Prudential shares fell 1% after reporting weaker performance in China and Indonesia. On the positive side, the pharmaceutical sector gained, with GSK shares rising 2%. GSK, along with other pharmaceutical companies, is resuming in Delaware to end more than 70,000 lawsuits alleging that the discontinued heartburn drug Zantac causes cancer. Direct Line Insurance shares rose 1.2% after Citigroup upgraded it to "neutral" from "buy," boosting non-life insurers.
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Technical forecasts for the GBP/USD pair today:
Based on the daily chart performance, the overall trend of the GBP/USD pair remains bullish. However, it's crucial to consider that today's US economic data results will significantly impact the sentiment towards the continued weakness of the US dollar. If the data is negative, it could reverse the pair's direction and turn it bearish, requiring a break below the support level of 1.3045
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