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GBP/USD Forecast: BoE's cautious tone fails to lift Pound Sterling

  • GBP/USD trade below 1.2950 in the European session on Friday.
  • The Bank of England left the policy rate unchanged at 4.5%, as expected.
  • The pair's near-term technical outlook points to a buildup of bearish momentum.

GBP/USD stays on the back foot and trades below 1.2950 after closing in negative territory on Thursday. The pair's technical outlook highlights a buildup of bearish pressure in the near term.

British Pound PRICE This week

The table below shows the percentage change of British Pound (GBP) against listed major currencies this week. British Pound was the weakest against the Canadian Dollar.

 USDEURGBPJPYCADAUDNZDCHF
USD 0.45%0.04%0.40%-0.42%0.62%-0.20%-0.15%
EUR-0.45% -0.53%-0.44%-0.86%0.03%-0.64%-0.63%
GBP-0.04%0.53% 0.41%-0.54%0.54%-0.15%-0.17%
JPY-0.40%0.44%-0.41% -0.81%0.01%-0.54%-0.67%
CAD0.42%0.86%0.54%0.81% 0.84%0.22%-0.28%
AUD-0.62%-0.03%-0.54%-0.01%-0.84% -0.66%-0.64%
NZD0.20%0.64%0.15%0.54%-0.22%0.66% 0.03%
CHF0.15%0.63%0.17%0.67%0.28%0.64%-0.03% 

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).

The Bank of England announced on Thursday that it left the policy rate unchanged at 4.5%, as widely expected. Only one policymaker, Swati Dhingra voted in favor of a 25 basis points (bps) rate cut. In the policy statement, the BoE reiterated that it will stick to a "gradual and careful" approach to removing policy restrain, adding that the policy will need to remain restrictive for sufficiently long. Although the BoE's cautious on further easing limited Pound Sterling's losses, it failed to support the currency in a noticeable way.

Meanwhile, the US Dollar (USD) held its ground on the back of upbeat data releases and didn't allow GBP/USD to gain traction. 

The Initial Jobless Claims in the US came in at 223,000 in the week ending March 15, the US Department of Labor reported on Thursday. This reading came in below the market expectation of 224,000. Additionally, Existing Home Sales increased by 4.2% in February, following January's 4.7% drop and Philadelphia Fed Manufacturing Index arrived at 12.5 in March, surpassing analysts' estimate of 8.5.

In the absence of high-tier data releases, the risk sentiment could drive the pair's action heading into the weekend. After posting marginal gains in the Asian session, US stock index futures turned south and were last seen losing between 0.2% and 0.3% on the day. A risk-averse market atmosphere in the second half of the day could support the USD and weigh on GBP/USD.

GBP/USD Technical Analysis

GBP/USD trades in the lower half of the ascending regression channel, and the pair closed the last 4-hour candle below the 20-period and the 50-period Simple Moving Averages (SMA). Additionally, the Relative Strength Index (RSI) dropped to its lowest level since late February near 40, reflecting a buildup of bearish momentum.

Looking south, first support could be spotted at 1.2900 (static level, round level) ahead of 1.2870 (100-period SMA) and 1.2850 (lower limit of the ascending channel). On the upside, 1.2950 (50-period SMA, static level) aligns as first resistance before 1.2990-1.3000 (static level, round level, mid-point of the ascending channel) and 1.3040 (static level).

Pound Sterling FAQs

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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