The GBP/USD faced a turbulent week. Traders reacted to hawkish monetary policy surprises from the US Federal Reserve and the Bank of England. Throughout the week, the pair showed extreme volatility, with the Pound Sterling barely holding its ground above the upcoming redline of 1.3600. Market participants are closely watching next week’s business PMI reports from the US and UK. At the same time, they’re clearly focused on US PCE inflation data, putting the currency pair’s trajectory into question.
Throughout the week, GBP/USD displayed two-way swings against the US Dollar, reflecting the market’s response to various economic indicators and monetary policy signals. The GBP/USD soared to new 11-week highs of 1.3723 following the dovish FOMC policy decisions. Shortly after this, selling pressure returned the pair back down closer to the 1.3500 mark. Analysts caution that a fall through the 21-day Simple Moving Average (SMA) located at 1.3524 might invite even deeper downturns. They now identify 1.3475 as the next potential support level, as the 50-day and 100-day SMAs come together there.
Traders are still working hard to gauge market sentiment. As long as the daily Relative Strength Index (RSI) remains above the 50 midline GBP/USD remains a buy-the-dip trade. Along with the opinions of business leaders, this prevailing attitude speaks to a confidence in the Pound Sterling’s durability despite variable metrics of economic health.
Market Reactions to Monetary Policy
GBP/USD movements have been heavily impacted by market reactions to the latest monetary policy announcements. After the Fed’s most recent announcements, forex traders witnessed a classic knee-jerk response that sent GBP/USD soaring past the 1.3650 zone. Yet ultimately, this bullish strength was short-lived as the pair struggled to hold above 1.3600.
For any substantial recovery, GBP/USD needs to see acceptance above the 1.3600-1.3620 supply zone on a daily candlestick closing basis. This threshold has become an important line of demarcation for traders keeping an eye on whether the bullish sentiment can be maintained.
As traders prepare for the upcoming business PMI reports, market participants will closely scrutinize these indicators for insights into economic expansion. A number above 50 typically indicates expansion in the service industries. Such expansion has the potential to increase confidence in the Pound Sterling, thus providing value to support the GBP/USD exchange rate.
Economic Indicators and Their Impact
The week was peppered with important economic data impacting the direction of GBP/USD. On Tuesday, UK labor data showed a continued easing in year-over-year growth for Average Earnings Excluding Bonus. The annual growth has since slowed to 4.8% in the three months to July, from 5% a month earlier. While this figure represents a positive trend that aligned with analysts’ forecasts, it underscores possible warnings about wage growth in the current UK economy.
The Unemployment Rate stayed flat at 4.7% — this too matched analysts’ expectations. Continued mixed signals move markets sentiment from bullish to bearish on GBP/USD. Investors awaited the announcement with bated breath, focused intently on the implications for forthcoming monetary policy.
Picture this, on Friday, data from the Office for National Statistics (ONS) gave us all the fantastic news. More good news from across the pond British Retail Sales jumped a stunning 0.5% in August! Given the reliance of GBP/USD on positive surprises, this one could provide support, acting as a signal of resilience in consumer spending even amid all the other economic uncertainty.
Technical Analysis and Future Expectations
From a technical point of view, GBP/USD is walking on eggshells. It’s true that it’s still biding its time, looking for greater guidance from forthcoming economic data releases. The pair retreated from more than two-month peaks. Yet it still pressed lower toward 1.3500 even as analysts were looking for major support levels to hold.
If GBP/USD falls decisively under the 21-day SMA at 1.3524, it would be in grave danger. Such a move would likely cause continued falling toward the August 4 low of 1.3254 if further selling pressure accumulates. If GBP/USD can break above the resistance level of 1.3600-1.3620, traders will take their focus up to higher targets. They’ll be on the lookout for new upside at 1.3681 4-Jul high and 1.3788 1-Jul high.
We continue to see a liquid market and think volatility will continue as market participants react to the flow of new data and policy direction. With traders weighing technical factors against fundamentally negative factors, GBP/USD looks set to remain volatile in the weeks ahead.