The GBP/USD pair is experiencing a downward trend after breaking out of an ascending channel. While the UK bond market saw some positive momentum, concerns about the UK economy and the strength of the US dollar are weighing on the pound. Traders should watch for key economic data and central bank announcements this week for potential directional shifts.
GBP/USD Downtrend Continues:
The GBP/USD currency pair has broken below an established uptrend, breaching an ascending channel and hitting resistance around 1.2522. A sell-off was recommended at this level, though with limited risk. The US dollar’s continued strength, coupled with the UK’s financial challenges and uncertainty surrounding the new government’s policies, are hindering the pound’s recovery attempts. Recent profit-taking pushed the pair towards the 1.2386 support level, where it closed the week. Further downward movement is anticipated, pending market reactions to the Bank of England’s announcements and US employment figures.
Bond Market Provides Brief Respite:
Before the implementation of Trump’s trade tariffs, the US dollar was supported by buying pressure. Simultaneously, the pound experienced a temporary boost due to increased overseas demand for UK bonds and decreased US yields. Some analysts believe the GBP/USD could maintain levels above the 1.2470 resistance, potentially leading to a bullish rebound.
UK Economic Indicators & Bank of England Action:
UK mortgage approvals saw a slight increase in December, reaching 66,500, exceeding expectations. The Bank of England also introduced a new facility to support the UK bond market in case of financial instability. This facility will provide liquidity to non-bank financial institutions during periods of market stress. However, while these measures are welcomed and have helped the pound recover slightly, analysts at ING Bank believe the currency remains weak, and anticipate the need for tighter fiscal policy in the March Budget, potentially leading to interest rate cuts later this year. In contrast, Scotiabank highlighted a strong increase in foreign demand for UK Treasuries, suggesting international investors are not overly concerned about UK fiscal policies.
US Dollar Strength and Central Bank Stance:
The US dollar’s performance reflects last week’s Federal Reserve announcement, which held US interest rates steady at 4.50%. While Federal Reserve Chairman Powell acknowledged the possibility of future rate cuts, he also emphasized a cautious approach, focusing on moving towards a neutral rate over the medium term. US GDP grew by 2.3% in the fourth quarter of 2024, falling short of both the previous 3.1% growth and market expectations of 2.7%. Consumer and government spending increases were offset by a drop in investment. The Personal Consumption Expenditures price index rose to 2.2%, below the anticipated 2.5%.
Trading Insights:
The British pound’s future performance is closely tied to the Bank of England’s upcoming announcement, US jobs data, and reaction to potential US tariffs. From a technical analysis perspective, the recent sell-off indicates a breakout from the upward channel. Bears are currently in control, with support around 1.2290 acting as a key level. A breach below this level could pave the way for a move towards the 1.2000 psychological support. Conversely, a move above the 1.2630 resistance would signal a shift in favor of the bulls. Ultimately, GBP/USD performance will be influenced by US data, Bank of England policy decisions, and investor sentiment towards US administration policies.
Final Recommendation:
Given the current market dynamics, a strategy of selling GBP/USD at each upside level is still preferred.
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