- GBP/USD declined below 1.2700 for the first time in nearly two weeks.
- 1.2670 aligns as next technical support for the pair.
- Pound Sterling is close to turning to technically oversold against the USD.
Following Monday's indecisive action, GBP/USD lost its traction and dropped to its lowest level in nearly two weeks below 1.2700. The near-term technical outlook suggests that the pair is about to turn oversold.
The broad-based US Dollar (USD) strength continues to weigh on the pair ahead of the Federal Reserve (Fed) and the Bank of England (BoE) policy meetings. The benchmark 10-year US Treasury bond yield holds above 4.3% after rising over 5% in the previous week and supports the USD.
Meanwhile, US stock index futures turned negative on the day after rising marginally during the Asian trading hours. In case safe-haven flows start to dominate the financial markets after Wall Street's opening bell, the USD could preserve its strength and force GBP/USD to stay on the back foot. In the absence of high-tier data releases from the US, investors could continue to react to changes in risk perception in the near term.
Ahead of the Fed and the BoE policy decisions, the UK's Office for National Statistics will release Consumer Price Index (CPI) data for February early Wednesday. On a yearly basis, the annual CPI inflation in the UK is forecast to soften to 3.6% from 4% in January.
GBP/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the 4-hour chart stays slightly below 30, suggesting that the pair is close to turning technically oversold. The last two times that the RSI dipped to the 30 area on the same chart in early and late February, GBP/USD staged a technical correction.
In case GBP/USD starts correcting higher, the Fibonacci 50% retracement level of the latest uptrend could act as first resistance near 1.2710 before the 100-period Simple Moving Average (SMA) at 1.2730 and 1.2750 (Fibonacci 38.2% retracement, descending trend line).
On the downside, 1.2670 (200-period SMA) aligns as key support before 1.2620 (Fibonacci 61.8% retracement) and 1.2600 (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, aka ‘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.
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