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GBP/USD Forecast: Pound sterling could stretch lower unless it reclaims 1.3100

  • GBP/USD struggles to shake off the bearish pressure, trades below 1.3100.
  • The technical picture highlights sellers' dominance in the near term.
  • September inflation data from the US will be watched closely by market participants.

GBP/USD failed to build on Tuesday's modest recovery gains and ended the day in the red on Wednesday. The pair fluctuates in a tight channel below 1.3100 in the European session on Thursday as the market focus shifts to September inflation data from the US.

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 US Dollar.

 USDEURGBPJPYCADAUDNZDCHF
USD 0.34%0.31%0.27%1.21%1.05%1.41%0.26%
EUR-0.34% 0.04%-0.05%0.89%0.68%1.06%-0.13%
GBP-0.31%-0.04% -0.14%0.87%0.64%1.05%-0.05%
JPY-0.27%0.05%0.14% 0.93%0.76%1.08%0.00%
CAD-1.21%-0.89%-0.87%-0.93% -0.12%0.19%-0.96%
AUD-1.05%-0.68%-0.64%-0.76%0.12% 0.42%-0.77%
NZD-1.41%-1.06%-1.05%-1.08%-0.19%-0.42% -1.12%
CHF-0.26%0.13%0.05%-0.00%0.96%0.77%1.12% 

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 US Dollar (USD) gathered strength against its rivals after the minutes of the Federal Reserve's (Fed) September policy meeting offered a hawkish surprise.

The publication reaffirmed that a "a substantial majority" of Fed policymakers supported the decision to lower the policy rate by 50 basis points (bps) but it showed that there was even a broader consensus that this initial step would not lock the Fed into any specific pace of policy-easing in the future. Moreover, the minutes highlighted that some participants favored a 25 bps cut, while "a few others" mentioned they could have supported that decision as well.

The US Bureau of Labor Statistics will release the September Consumer Price Index (CPI) data in the early American session on Thursday. On a yearly basis, the CPI is forecast to rise by 2.3%, at a softer pace than the 2.5% increase recorded in August. The monthly core CPI, which excludes volatile food and energy prices, is seen rising 0.2%.

In case the monthly core CPI unexpectedly comes in at or below 0%, the immediate reaction could cause the USD to come under selling pressure. On the flip side, the market positioning suggests that the USD doesn't have a lot of room on the upside. Investors see a nearly 20% probability of the Fed leaving the policy rate unchanged and price in about an 80% chance of a 25 basis points (bps) cut in November. Nevertheless, a monthly CPI reading of 0.3% or higher could help the USD hold its ground and make it difficult for GBP/USD to stage a meaningful recovery.

GBP/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the 4-hour chart stays below 40, reflecting the bearish bias. On the downside, supports could be seen at 1.3050 (static level), 1.3000 (round level, static level) and 1.2940 (static level).

Looking north, first resistance could be spotted at 1.3100 (Fibonacci 78.6% retracement level of the latest uptrend) before 1.3170 (Fibonacci 61.8% retracement).

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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