The British pound sterling was the best performer among major currencies, rising 3.9% year-to-date August 27 against the US dollar.
The current strength of sterling was supported by the Bank of England’s dovish monetary policy stance after the first 25 basis point cut of the key interest rate at its last meeting in August to cut it to 5% from a 16-year high of 5.25%, which remained unchanged for a year.
The Bank of England may adopt a deeper and slower rate cut cycle
The Bank of England’s cautious stance was reiterated last Friday, August 23, during the Jackson Hole symposium where Bank of England Governor Bailey stated that interest rate cuts in United Kingdom should not be rushed because it is still too early to be sure that inflation will be overcome despite longer-term inflationary pressures receding.
Thus, in the future, this is likely to create a gap between interest rates in the US and the UK as short-term interest rate markets are likely to price the deeper and slower rate cut cycle in United Kingdom.
Medium-term trend of GBP/USD as of August 27, 2024 GBP/USD price movements saw an upward breakout last Tuesday, August 20, after stabilizing for almost a year in the “symmetrical triangle” range since July 13, 2023.
In addition, it has also crossed resistance to the previous secular long-term downtrend line that limited previous highs since July 2014.
Although the RSI Daily Momentum indicator is now hovering at the overbought level at 74, there is no bearish divergence signal appearing at this point indicating a lower likelihood of a bearish GBP/USD reversal scenario.
GBP/USD analysis: downside correction risk
The GBP/USD pair opened the week with marginal losses after rejecting the almost two-week rally near the key resistance trendline at 1.3229 for the third time.
The RSI and Stochastics are holding in overbought territory, indicating a high risk of a downside correction.
Overall, after its recent rapid rise, the GBP/USD pair may be subject to profit-taking. However, as long as the pair continues its upward trend in the medium-term picture, with valuations rising significantly in 2024, many investors feel uncomfortable putting more money into stocks. Not sure where to invest next? Get access to our proven portfolios and discover high-potential opportunities.
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The divergence in interest rate policy coupled with a good run of UK data has made the pound one of the best performing currencies over the past couple of weeks.
The pound has gained some great ground against its peers, especially against the weaker US dollar. The pound is trading at multi-month highs against the US dollar while the week is also on a strong footing against the euro.
In the short term, the pound pairs remain interesting with the possibility of a cable correction. The GBP/JPY pair still has room to run but the stronger Japanese yen has been capping gains of late
GBP/USD Strategic Analysis: Continued Upward Momentum
The sharp and rapid rise is coupled with strong momentum; GBP is expected to continue to rise, notes Kwek Ser Liang and Lee Su An, FX strategists at UOB Group.
A break of 1.3105 would halt GBP’s upward march
24-hour outlook: “We highlighted yesterday that ‘as long as 1.3160 is not breached, there is scope for GBP to test 1.3250, after which the advance may stall’. While GBP has not broken 1.3160, it has also not tested 1.3250, trading in the 1.3181/1.3222 range. The strong advance from late last week is likely to stall. Today, we expect GBP to trade in a range, perhaps between 1.3160 and 1.3220.” 1-3 week outlook: “The level to watch is 1.3320. GBP rallied last Friday. “We noted yesterday (Monday) that “the sharp and rapid rise is coupled with strong momentum.” GBP is expected to continue to rise. As we noted, “The next level to watch is 1.3320
Inter-market analysis also supports the potential start of a medium-term uptrend phase for GBP/USD. The two-year sovereign yield spread between UK government bonds and US Treasuries has broken above the previous key downtrend line resistance from July 12, 2023.
Investors continue to price in a potential interest rate cut by the Bank of England (BoE) in September, despite a stream of positive UK data in the previous week.
Preliminary figures for August pointed to stronger-than-expected expansion in both the UK manufacturing and services sectors, with investors noting that service sector inflation remains stubbornly high.
This has boosted sterling sentiment as it has prompted GBP investors to scale back their bets that the BoE’s Monetary Policy Committee will continue to cut interest rates in a row in September.
