GBP/USD has fallen sharply, erasing almost all of last week’s rebound. This advance occurs against a highly charged macro environment, including contradictory macroeconomic indicators out of the United States and escalated geopolitical strife. These are the things investors are nitpicking. At the same time, the currency pair trades just above the bottom of its weekly trading range, raising concerns about its next potential move.
The recent movements in GBP/USD illustrate the fine line between economic data and trader psychology. After an initial round of relief, the economic and market environment turned upside down. Geopolitical tensions escalated when former President Donald Trump sanctioned Russian oil companies. This unexpected development has rekindled risk-off flows across investors, plumbing conditions even deeper for GBP/USD traders.
Market Dynamics and Economic Indicators
Over the last few days, GBP/USD has been in full sell-off mode, especially after breaking back below the 1.3450 handle and failing to hold above it. The currency pair may find it difficult to hold above the 21-day Simple Moving Average (SMA). This violation marks an important shift towards a bearish momentum. Additionally, the 14-day Relative Strength Index (RSI) has fallen below the important 50 mark. It now is hovering around 41, indicating that bearish potential is still very much alive.
Economic data out of the UK has been all over the place. Meanwhile, the S&P Global Flash UK Composite PMI for October soared to 51.1. This increase tops September’s 50.1 and is above the predicted 50.6. This increase is indicative of a slight recovery in economic activity across the UK.
In the US, the Office for National Statistics (ONS) released a surprise jump in UK Retail Sales. They soared 0.5% in September, the fourth monthly increase in a row! Inflation accelerated last month. Annual inflation climbed to 3% in September, up from 2.9% in August. This new hike has an outsized impact on expectations for the future course of monetary policy.
“Traders rushed to price a 75% chance of the BoE cutting rates by its December meeting – up sharply from a 46% probability before the data was published – although those odds eased back to 61% on Thursday.” – Reuters
Geopolitical Tensions and Market Sentiment
The renewed geopolitical tensions after Trump’s sanctions on Russian oil companies have added to the uncertainty on financial marketplaces. Traders have been on the defensive as investors had once again discovered temporary relief, only for the latest developments to bring a more cautious tone to traders. The most recent stage many are already pondering what this means for global economic stability, and how that might affect central bank behavior.
The lens is especially pointed now toward what’s likely to be the Federal Reserve Board’s most consequential monetary policy meeting in decades, October 28-29. Fresh interpretations on the Fed’s rate cut trajectory will be key for GBP/USD in the days ahead. If the negative pressure continues, experts think the currency pair could reach the 1.3250 supply zone. First, they note short-term momentum with immediate support at the 200-day SMA currently sitting at 1.3226.
As traders continue to process all of these developments, all eyes will be trained on any recovery moves by GBP/USD. In order for the pair to regain upward momentum, the pair would have to recapture the 21-day SMA, currently acting as resistance at 1.3398. The next significant upside hurdles are just above this level. These latter levels are at the 50-day SMA of 1.3460 and the 100-day SMA of 1.3481.
Future Outlook for GBP/USD
With market sentiment changing quickly, GBP/USD traders will want to keep a close eye on important support and resistance levels. A sustained break below 1.3142 could confirm a downtrend toward August’s lows, raising further concerns about the currency pair’s stability in the face of adverse conditions.
If GBP/USD manages to overcome the stated resistance levels, it may have positive momentum. We’ll have to see how future increases play out based on upcoming key economic data and central bank announcements. The September US Nonfarm Payrolls report is set to be released soon after government funding is restored, which could significantly impact market perceptions ahead of the Fed’s policy meeting.