GBP/USD Forecast: Pound Sterling struggles to gather recovery momentum

GBP/USD rose toward 1.2450 after falling below 1.2400 earlier in the day.
Near-term technical outlook does not point to a buildup of recovery momentum.
Markets will stay focused on geopolitics heading into the weekend.

Eren Sengezer FXStreet

GBP/USD reversed its direction and turned positive on the day near 1.2450 after falling to a fresh multi-month low below 1.2400 earlier in the day. The cautious market stance could make it difficult for GBP/USD to stretch higher ahead of the weekend.

In the Asian trading hours, the US Dollar (USD) gathered strength against its rivals as investors sought refuge following reports of Israeli missiles striking Iran. Israel has not officially confirmed the news but several outlets reported that US officials said that Israel was behind the attack.

Following the initial flight to safety, the market mood improved slightly on easing fears over a further escalation of the Iran-Israel conflict. According to the CNN, a regional intelligence source said that direct state-to-state strikes between Israel and Iran were over.

Although US stock index futures rebounded from daily lows, they remain in the negative territory. In the absence of high-tier data releases, the risk perception could impact the USD's valuation and drive GBP/USD's action in the second half of the day.

Unless there is a fresh development that could improve the market mood in a significant way, investors could refrain from making risky bets amid the geopolitical uncertainty heading into the weekend.

GBP/USD Technical Analysis

GBP/USD was last seen trading near the mid-point of the descending regression channel. Meanwhile, the Relative Strength Index (RSI) indicator on the 4-hour chart rose toward 50, suggesting that the bearish bias remains intact, while the selling pressure stays modest.

On the downside, 1.2400 (psychological level, static level) aligns as first support before 1.2350 (lower limit of the descending channel). Resistances are located at 1.2450 (mid-point of the descending channel), 1.2500 (50-period Simple Moving Average (SMA), static level) and 1.2560 (upper limit of the descending channel).

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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