Key Moments
- GBP/USD advances about 0.1% to trade near 1.3370 in early European dealings, marking a third consecutive day of gains.
- Market pricing via the CME FedWatch tool reflects expectations that the Fed will keep rates at 3.50%-3.75%, while the BoE is also seen holding policy steady.
- JP Morgan anticipates the BoE will maintain an extended pause as higher gas prices are viewed as preventing inflation from returning to the 2% target.
Fundamental Overview
The Pound Sterling is extending its recovery against the US Dollar for a third straight session on Wednesday, with GBP/USD edging up 0.1% to trade close to 1.3370 in early European hours. The pair is benefiting from a softer US Dollar as investors adopt a cautious stance ahead of the Federal Reserve’s monetary policy decision scheduled for 18:00 GMT.
At the time of writing, the US Dollar Index (DXY) – which tracks the performance of the Greenback against six major peers – is fluctuating near its three-day low around 99.50, reflecting subdued demand for the US currency.
Positioning based on the CME FedWatch tool indicates that market participants largely expect the Federal Reserve to keep interest rates unchanged within the current 3.50%-3.75% band. This outlook is supported by concerns that rising oil prices, driven by energy supply issues, have unsettled global inflation expectations, making a policy hold the favored scenario among traders.
For the Pound, attention this week is turning to two key catalysts: labor market data from the United Kingdom covering the three months ending in January, and the Bank of England’s interest rate announcement on Thursday. Both events are seen as critical for near-term direction in GBP/USD.
In a report cited in the article, JP Morgan expects the Bank of England to keep rates unchanged throughout the year, arguing that elevated gas prices are likely to prevent inflation from returning to the central bank’s 2% objective.
GBP/USD Technical Picture
From a technical standpoint, GBP/USD is trading just below 1.3370 in European dealings. Despite the ongoing rebound, the pair remains entrenched in a broader downtrend following repeated failures to break above a descending resistance line drawn from the January 29 peak at 1.3847. The pair is also struggling to reclaim the 20-day Exponential Moving Average (EMA), which is currently limiting upside around 1.3410.
Recent price action has formed a clear pattern of lower highs and lower lows, underlining the prevailing selling bias even as the pair stabilizes above 1.3320. The Relative Strength Index (RSI) has moved up from a bearish zone between 20.00 and 40.00 into the neutral 40.00-60.00 band, pointing to waning downside momentum, though not yet indicating a shift in favor of buyers.
| GBP/USD Technical Levels | Level | Comment |
|---|---|---|
| Immediate resistance | 1.3410 | 20-day EMA and former 1.3400 trend-line area |
| Next upside target on break higher | 1.3500 | Exposed if 1.3410 area is decisively cleared |
| First support | 1.3320 | Initial downside cushion |
| Secondary support | 1.3220 | Last week’s trough |
| Deeper downside target | 1.3100 | Comes into view if 1.3220 breaks |
Technically, the initial resistance is located near 1.3410, where the 20-day EMA coincides with the broken 1.3400 trend-line zone. A sustained move above this region would open the door for a push toward the 1.3500 area. On the downside, first support is seen at 1.3320, followed by last week’s low around 1.3220, which in turn protects a further decline toward 1.3100.
As long as GBP/USD trades below 1.3410, rallies are expected to be vulnerable to renewed selling, and the short-term structure continues to favor additional tests of support levels.
Pound Sterling: Background and Drivers
The Pound Sterling (GBP) is the official currency of the United Kingdom and is described in the article as the oldest currency in the world, dating back to 886 AD. It is identified as the fourth most heavily traded currency in the global foreign exchange market, accounting for 12% of all FX transactions and averaging $630 billion in daily turnover, based on 2022 figures cited in the text.
Key GBP pairs highlighted include GBP/USD – commonly referred to as “Cable” – which represents 11% of global FX volume, GBP/JPY (known among traders as the “Dragon”) at 3%, and EUR/GBP at 2%. Issuance of the Pound Sterling is the responsibility of the Bank of England.
Role of the Bank of England
The article emphasizes that monetary policy decisions taken by the Bank of England are the dominant factor influencing the value of the Pound. The central bank’s policy framework is centered on achieving “price stability,” which it defines as keeping inflation near 2%. Adjustments to interest rates are its main tool to achieve this objective.
When inflation is elevated, the Bank of England may raise interest rates to curb price pressures by making borrowing more expensive for households and businesses. This is generally supportive for GBP, as higher yields can attract foreign capital. Conversely, when inflation is low and signaling slowing growth, the Bank may lower rates to encourage borrowing and investment, which can weigh on the currency.
Economic Data and Trade Balance Effects
Macroeconomic indicators are also important for the Pound’s trajectory. The article points to data such as GDP, Manufacturing and Services PMIs, and employment figures as key metrics. Strong readings tend to support Sterling by attracting investment and potentially prompting the BoE to tighten policy, whereas weak data can put downward pressure on the currency.
The trade balance is another significant factor for GBP. This metric captures the gap between export revenues and import spending over a given period. When a country exports more than it imports, the resulting positive trade balance can bolster its currency due to increased demand from foreign buyers. In contrast, a negative trade balance generally has the opposite effect and can undermine the currency.
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