The GBP/USD pair has gained ground, approaching the 1.2700 mark, breaking a three-day losing streak during the Asian session on Thursday. This upward movement is primarily driven by a weaker US Dollar (USD), influenced by rising expectations of a deeper rate cut by the US Federal Reserve (Fed) in September. However, the upside potential for the British Pound (GBP) remains limited due to heightened risk aversion linked to escalating Middle East tensions and speculations of additional rate cuts by the Bank of England (BoE).
Key Takeaways
Fed Rate Cut Expectations: Rising expectations of aggressive rate cuts by the Fed are weakening the US Dollar, boosting the GBP/USD pair.
Middle East Tensions: Geopolitical tensions between Iran and Israel are contributing to increased risk aversion, potentially limiting the upside for GBP.
BoE Rate Cut Expectations: Anticipation of further rate cuts by the BoE in August and December may restrain the appreciation of GBP/USD.
Technical Levels: The GBP/USD pair is testing resistance around the 1.2700 level. Clearing this resistance is crucial for further gains.
Fed Rate Cut Expectations Boost GBP/USD Gains
Keyword: GBP/USD Gains
The anticipation of aggressive rate cuts by the Fed has significantly impacted the US Dollar, providing a boost to the GBP/USD pair. According to the CME FedWatch tool, there is now a 72.0% probability of a 50-basis point interest rate cut by the Fed in September, up from 11.8% a week earlier.
This shift in expectations is largely due to weaker employment data from July, which has heightened concerns about a potential US recession. The US Nonfarm Payrolls (NFP) came in weaker than expected, and the Unemployment Rate rose to its highest level since November 2021.
Federal Reserve Bank of San Francisco President Mary Daly recently expressed increased confidence that US inflation is moving toward the Fed's 2% target. Daly noted that "risks to the Fed's mandates are becoming more balanced" and highlighted the possibility of rate cuts in upcoming meetings.
Middle East Tensions and BoE Rate Cut Expectations
On the British Pound (GBP) front, increased risk aversion linked to escalating Middle East tensions could lead traders to shy away from risk-sensitive currencies like the Pound Sterling. According to US intelligence officials, Iran and its allies are preparing potential retaliation against Israel following the recent killings of a top Hezbollah commander in Lebanon and a senior Hamas leader in Tehran. This geopolitical tension adds a layer of uncertainty to the market, potentially limiting the upside for GBP.
Furthermore, the Bank of England (BoE) is expected to deliver a 25-basis point rate cut at its August meeting. Market expectations now include the possibility of two more quarter-point rate cuts by the BoE by December. This outlook on the BoE's monetary policy could further restrain the appreciation of GBP/USD.
Technical Analysis: GBP/USD Gains
Keyword: GBP/USD Gains
From a technical perspective, GBP/USD is currently testing the resistance around the 1.2700 level. The weekly chart indicates a large coiling pattern, suggesting potential for a bullish pinbar formation if the pair closes around current levels. However, the daily chart shows significant resistance at the 0.66 level, including the 200-day MA and EMA. Clearing this resistance is crucial for the pair to maintain its upward momentum.
The GBP/USD pair may find support at the 0.6470 level, with further resistance at 0.6575. If the pair manages to break above these levels, it could head towards the upper bounds of the coiling pattern.
The GBP/USD pair's future movements will depend on further economic data, geopolitical developments, and central bank announcements. Investors will be closely watching the Fed's and BoE's upcoming decisions to gauge the direction of monetary policy and its impact on the currency markets.
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