- GBP/USD started to edge lower after posting gains on Wednesday.
- Critical resistance for the pair is located at 1.2550.
- Improving risk mood could cap the USD's upside later in the day.
GBP/USD gained traction in the late American session on Wednesday and closed the day in positive territory. The pair stays under modest bearish pressure early Thursday but manages to hold above 1.2500.
Following Tuesday's rally, the US Dollar (USD) came under heavy selling pressure in the second half of the day on Wednesday and allowed GBP/USD to turn north.
The Federal Reserve (Fed) maintained the policy rate at 5.25%-5.5% following the April 30 - May 1 policy meeting, as widely anticipated. Additionally, the Fed announced that they will dial back the pace of balance sheet reduction by cutting the Treasury redemption cap to $25 billion per month from $60 billion starting June 1.
In the post-meeting press conference, Fed Chairman Jerome Powell acknowledged it was likely that gaining the greater confidence in inflation moving toward the 2% target will likely take longer than previously anticipated. When asked about the possibility of further policy tightening, Powell said that it was unlikely that the next interest rate move would be a hike. Powell refrained from hinting at the timing of the policy pivot, reiterating the data-dependent approach.
The US economic docket will feature weekly Initial Jobless Claims and first-quarter Unit Labor Costs data on Thursday. In case these data come in better than market forecast, the immediate reaction could support the USD and weigh on GBP/USD. Meanwhile, US stock index futures were last seen rising between 0.4% and 0.8%. A risk rally in the second half of the day could make it difficult for the USD to find demand, even if the data seem positive for the currency.
GBP/USD Technical Analysis
The 200-day Simple Moving Average (SMA) aligns as critical resistance at 1.2550. In case GBP/USD rises above that level and starts using it as support, technical buyers could show interest. In this case, 1.2600 (Fibonacci 50% retracement of the latest downtrend) could be seen as next resistance before 1.2660 (Fibonacci 61.8% retracement).
On the downside, first support is located at 1.2500 (static level, psychological level) before 1.2480 (100-period SMA on the 4-hour chart) and 1.2450 (Fibonacci 23.6% 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, 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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