GBP soared around half a percent on Monday and neared 1.3590 against the US Dollar. Currency traders around the world are waiting with bated breath for significant monetary policy news from both the US Federal Reserve (Fed) and the British Bank of London (BoE). One consequence of the pro-Brexit victory narrative is the resulting determined GBP strength against the majors. This is an unusual moment of cautious optimism in the foreign exchange market.
Historically significant, the Pound Sterling is the world’s oldest remaining currency still in use today, with its introduction in 886 AD. It is the fount of the pound sterling — London’s status as the world’s pre-eminent global finance city — the United Kingdom’s official currency. Monday, GBP/USD traded flat just above the 1.3580 level. This move reflects a cautious, but tentative trading backdrop as market players look to central banks for clarity.
Current Market Movements
The GBP started the week strong, trading up versus most major peers. As displayed above, the GBP has made a visible upward tick against the USD in recent days. Nevertheless, it is still languishing underneath the 1.3600 level. That being said, of course, this is showing great resilience and performance, but it’s still inside of Friday’s trading range, which indicates not much volatility so far.
Statistics indicate that the Pound Sterling accounts for approximately 12% of all foreign exchanges transactions globally. This huge presence even makes it the fourth most traded currency around the world. The currency, despite recent technology ups and downs, remains at the center of global markets with approximately $630 billion a day in foreign exchange transactions flowing through it. Key trading pairs for GBP include GBP/USD, accounting for 11% of all FX trades, GBP/JPY at 3%, and EUR/GBP at 2%.
Even with these minor improvements, the Pound has a steep uphill climb before it can breakout convincingly above important resistance levels. The 20-day Exponential Moving Average (EMA) touching higher today at 1.3500 provides a good support option for traders. Perhaps the most watched indicator on the market is the 14-day Relative Strength Index (RSI), which has found it difficult to break above the important 60.00 threshold. A continued move higher past this mark may indicate new bullish GBP momentum.
Key Support and Resistance Levels
While traders continue to interpret the trends, some key levels have shown to be very important in the continued direction of the Pound Sterling. Importantly, the horizontal line drawn from the September 26 peak of 1.3434 acts as a key support area. Traders are laser-focused on this level. A decisive drop below this level could indicate a turn toward bearish sentiment. If this support holds it could bring increased bullish momentum.
High of 1.3750 from Jan 13 2022 is a key barrier for the GBP. Further, a break above this resistance level could give the bulls the momentum needed for a more sustained rally. Until then, the currency’s trajectory will be largely driven by external factors. These are important examples of the BoE heeding policy lessons learnt from the Fed, and vice versa, including decisions on monetary policy.
Market analysts are tentatively optimistic on the Pound’s short-term prospects. They go on to reinforce, though, that it’s external economic indicators and political developments that are going to be most important in shaping its future moves.
Anticipating Central Bank Announcements
The upcoming monetary policy announcements from both the Federal Reserve and the Bank of England are poised to have a substantial impact on the currency markets. The Fed is expected to address ongoing inflationary pressures and adjust interest rates accordingly, while the BoE will likely focus on economic recovery post-pandemic and potential rate adjustments.
Market sentiment suggests that any signals of interest rate changes could lead to volatility across major currencies, including the Pound Sterling. Investors are particularly keen on how these central banks’ policies will influence inflation and economic growth in their respective regions.
Traders are anticipating the market-moving announcement. Alongside this, they are looking closely at the macroeconomic picture, focusing on a range of factors including new employment figures, trade balances and salient geopolitical events that may drive central banks’ monetary policy choices.