GBP/USD Forecast: Pound Sterling struggles to attract bulls
- GBP/USD trades below 1.3000 after closing in the red on Wednesday.
- Rising UK gilt yields support the Pound Sterling early Thursday.
- The risk-averse market atmosphere could limit the pair's upside.
GBP/USD lost its traction and closed in negative territory on Wednesday. The pair trades marginally higher early Thursday but remains below 1.3000.
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 Euro.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.54% | -0.15% | -0.61% | 0.19% | 0.50% | 0.09% | -0.27% | |
| EUR | 0.54% | 0.50% | -0.15% | 0.73% | 1.13% | 0.63% | 0.29% | |
| GBP | 0.15% | -0.50% | 0.18% | 0.36% | 0.67% | 0.21% | 0.03% | |
| JPY | 0.61% | 0.15% | -0.18% | 0.86% | 0.48% | -0.04% | -0.14% | |
| CAD | -0.19% | -0.73% | -0.36% | -0.86% | 0.27% | -0.17% | -0.43% | |
| AUD | -0.50% | -1.13% | -0.67% | -0.48% | -0.27% | -0.52% | -0.82% | |
| NZD | -0.09% | -0.63% | -0.21% | 0.04% | 0.17% | 0.52% | -0.36% | |
| CHF | 0.27% | -0.29% | -0.03% | 0.14% | 0.43% | 0.82% | 0.36% |
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).
Rising United Kingdom (UK) gilt yields following the announcement of the UK Autumn Budget help Pound Sterling stay resilient against its rivals in the European morning session. The 2-year gilt yield rose to its highest level since mid-July and the 20-year yield reached a one-year top above 4.8% as markets opened on Thursday.
Assessing how the UK fiscal policy could influence the Bank of England's (BoE) policy outlook, Danske Bank analysts said in a report published on Wednesday: "We have long argued that a more expansionary budget could trim markets' expectation for a December cut, which today's events have provided support for." "We continue to expect a 25bp cut in November and an unchanged decision in December," they added
Despite rising UK gilt yields, GBP/USD struggles to gather bullish momentum as the US Dollar (USD) benefits from the risk-averse market atmosphere. At the time of writing, US stock index futures were down between 0.5% and 1.15%, while the UK's FTSE 100 Index was losing 0.55%.
In the second half of the day, the weekly Initial Jobless Claims data will be featured in the US economic docket. Investors expect the number of first-time applications for unemployment benefits to edge lower to 227,000 from 230,000 in the previous week. In case this figure rises toward 250,000, the immediate reaction could weigh on the USD. Nevertheless, GBP/USD could have a hard time extending its rebound if safe-haven flows continue to dominate the action in financial markets following Wall Street's opening bell.
GBP/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the 4-hour chart stays near 50, highlighting a lack of bullish momentum. On the upside, 1.3020 (20-day SMA) aligns as immediate resistance before 1.3100 (round level) and 1.3140 (50-day SMA).
Looking south, key support could be spotted at 1.2975, where the 100-day Simple Moving Average (SMA) is located. If GBP/USD falls below this level and starts using it as resistance, it could extend its slide toward 1.2900 (static level).
UK gilt yields FAQs
UK Gilt Yields measure the annual return an investor can expect from holding UK government bonds, or Gilts. Like other bonds, Gilts pay interest to holders at regular intervals, the ‘coupon’, followed by the full value of the bond at maturity. The coupon is fixed but the Yield varies as it takes into account changes in the bond's price. For example, a Gilt worth 100 Pounds Sterling might have a coupon of 5.0%. If the Gilt's price were to fall to 98 Pounds, the coupon would still be 5.0%, but the Gilt Yield would rise to 5.102% to reflect the decline in price.
Many factors influence Gilt yields, but the main ones are interest rates, the strength of the British economy, the liquidity of the bond market and the value of the Pound Sterling. Rising inflation will generally weaken Gilt prices and lead to higher Gilt yields because Gilts are long-term investments susceptible to inflation, which erodes their value. Higher interest rates impact existing Gilt yields because newly-issued Gilts will carry a higher, more attractive coupon. Liquidity can be a risk when there is a lack of buyers or sellers due to panic or preference for riskier assets.
Probably the most important factor influencing the level of Gilt yields is interest rates. These are set by the Bank of England (BoE) to ensure price stability. Higher interest rates will raise yields and lower the price of Gilts because new Gilts issued will bear a higher, more attractive coupon, reducing demand for older Gilts, which will see a corresponding decline in price.
Inflation is a key factor affecting Gilt yields as it impacts the value of the principal received by the holder at the end of the term, as well as the relative value of the repayments. Higher inflation deteriorates the value of Gilts over time, reflected in a higher yield (lower price). The opposite is true of lower inflation. In rare cases of deflation, a Gilt may rise in price – represented by a negative yield.
Foreign holders of Gilts are exposed to exchange-rate risk since Gilts are denominated in Pound Sterling. If the currency strengthens investors will realize a higher return and vice versa if it weakens. In addition, Gilt yields are highly correlated to the Pound Sterling. This is because yields are a reflection of interest rates and interest rate expectations, a key driver of Pound Sterling. Higher interest rates, raise the coupon on newly-issued Gilts, attracting more global investors. Since they are priced in Pounds, this increases demand for Pound Sterling.
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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.
