Sterling Rebounds as Dollar Softens, But Faces Headwinds

Key Moments

GBP/USD Starts Week Firmer, But Momentum Stays Fragile

The GBP/USD pair opened the new week with modest gains, retracing some of Friday’s sharp decline that had driven the pair to its lowest level in more than a week. Despite the bounce, spot prices are trading below the mid-1.3500s during the Asian session, signaling a lack of strong bullish conviction and calling for caution before concluding that the recent retreat from this month’s peak – the highest since February – has fully ended.

The US Dollar has paused after Friday’s advance to a nearly two-week high, a move that was aided by month-end portfolio rebalancing. This pause is providing short-term support to GBP/USD. At the same time, the British Pound is drawing some backing from UK Chancellor John Healey’s comments emphasizing that maintaining fiscal discipline is the top priority for Prime Minister Andy Burnham’s government ahead of the Autumn Budget on October 28.

Policy Divergence and Geopolitics Support the Dollar

In interest rate expectations, markets have pushed back the anticipated timing of the next Bank of England rate hike to 2027, from late 2026 previously. By contrast, remarks from US Federal Reserve Chair Kevin Warsh on Friday have boosted the probability of a rate increase in September. This emerging policy divergence, alongside heightened geopolitical risk, is expected to limit any meaningful downside in the safe-haven US Dollar and could restrain further gains in GBP/USD.

Geopolitical developments in the Middle East are also influencing sentiment. US forces have struck two Iranian launchers on Larak Island in Iran. In response, Iran has launched ballistic missiles from Tehran, Lorestan, Karaj, Khorramabad and Shiraz, as well as anti-ship cruise missiles from southern Iran toward the Strait of Hormuz. These events have prompted market participants to reintroduce a geopolitical risk premium, which is generally supportive for the USD.

US Data Calendar in Focus as Month Begins

Looking ahead, traders are turning their attention to a series of important US macroeconomic releases scheduled at the start of the new month. The highlight will be Friday’s US monthly jobs report, the Nonfarm Payrolls (NFP). Until those data points are released, the underlying backdrop suggests that the US Dollar’s bias remains to the upside, making it prudent to be wary about initiating aggressive bullish positions in GBP/USD.

GBP/USD Technical Picture: Neutral Within Key Fibonacci and SMA Levels

On the 4-hour chart, GBP/USD is trading between a cluster of Fibonacci retracement supports and nearby moving average resistance, indicating a neutral short-term technical stance. The 100-period Simple Moving Average (SMA), currently at 1.3559, is capping the upside. This is reinforced by the 23.6% Fibonacci retracement at 1.3579, which adds to the overhead resistance slightly above the current consolidation zone.

On the downside, initial support lies at the 38.2% Fibonacci retracement at 1.3521. Below that, further structural support is seen at the 50.0% retracement at 1.3474 and the 61.8% retracement at 1.3427. A more distant, but notable, support zone is defined by the 78.6% retracement at 1.3360.