GBP/USD Forecast: Pound Sterling holds steady above key support level

GBP/USD moves sideways above 1.2600 to start the new week.
The pair closed the previous week above the 200-day SMA.
The USD could stay resilient against its rivals in case the mood sours.

Eren Sengezer FXStreet

GBP/USD fell toward 1.2570 in the early American session on Friday but staged a decisive recovery to close the day virtually unchanged above 1.2600. The pair trades marginally lower on the day but holds comfortably above 1.2600 in the European session on Monday.

The impressive March jobs report from the US triggered a rally in the US Treasury bond yields and boosted the US Dollar (USD) on Friday. Nonfarm Payrolls in the US rose 303,000 in March, beating the market expectation by a wide margin, and the Unemployment Rate edged lower to 3.8% from 3.9%.

The probability of the Federal Reserve (Fed) leaving the policy rate unchanged in June rose slightly above 50% from 40% before the US labor market data.

Nevertheless, as Wall Street's main indexes surged higher following the opening bell, the USD lost its strength ahead of the weekend and allowed GBP/USD to reverse its direction.

The economic calendar will not offer any important data releases that could influence GBP/USD's action on Monday. Hence, investors could continue to pay close attention to the risk perception.

US stock index futures turned flat on the day after trading moderately higher earlier in the session. A negative shift in risk mood could support the USD and weigh on GBP/USD.

GBP/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the 4-hour chart retreated to 50, suggesting that GBP/USD has lost its recovery momentum. On the downside, the 200-day Simple Moving Average (SMA) aligns as key support at 1.2590. A daily close below that level could attract technical sellers and open the door for an extended decline toward 1.2540 (end-point of the latest downtrend).

GBP/USD could encounter stiff resistance at 1.2670 (100-day SMA, 50-day SMA) before 1.2710 (Fibonacci 50% retracement of the downtrend).

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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

FXStreet

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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