The British Pound (GBP) encountered downward pressure, slipping to approximately $1.26, marking its lowest level since February 19th. This decline followed stagnant UK consumer spending in February and remarks by Bank of England Governor Andrew Bailey hinting at potential interest rate cuts in 2024. Despite expectations of a 0.3% decline, UK retail sales remained flat last month, contrasting with the significant 3.6% surge in January. Governor Bailey acknowledged positive signs of decreasing inflation but stressed the necessity for more certainty in managing price pressures. The Bank of England, with an 8-1 vote, maintained borrowing costs at a 16-year high of 5.25%, despite recent data showing a decline in inflation to its lowest point in nearly two-and-a-half years, albeit remaining above the bank’s target level.
In contrast, the sterling’s resilience over the past six months has been partially attributed to expectations that the Bank of England will be slower to cut rates compared to the Federal Reserve and the European Central Bank. However, recent shifts in market sentiment suggest a possibility of the Bank of England being the first among the three to cut rates. Despite this, the markets have not abandoned the pound entirely, with speculators trimming their bullish sterling position. Additionally, the pound may find support in historical trends, as April traditionally represents its strongest month of the year in terms of performance.
Technical Analysis
The 4-hour shows that the market sentiment surrounding GBP remains cautious, reflected in the slightly upward-sloping but sub-50 RSI (44.44). The GBPUSD price currently sits at 1.26231, attempting to hold above the 20-SMA (green line). This suggests a potential short-term bounce, although the price remains below the 50-SMA (blue line) and 100-SMA (orange line), indicating a broader downtrend.
Short-term trading opportunities may arise towards the support at 1.25751 if the recovery falters. A breakdown below the 1.25751 support level could confirm the bearish momentum, which could see the price fall towards the seven-week low of 1.25353 in the near term. A hawkish shift from the Fed or weak UK GDP data could exacerbate the decline.
However, a sustained break above the 23.60% Fibonacci retracement level could bring the 1.26848 into focus in the coming sessions. A sustained break above 1.26848 could trigger a bullish move towards the 50.00% Fibonacci retracement level (1.27346) and potentially the 61.80% Fibonacci retracement level (1.27722). This scenario would be supported by a dovish surprise from the Federal Reserve or a strong rebound in UK GDP data.
Summary
The GBPUSD outlook hinges on the interplay between central bank policy and economic data. A dovish pivot from the Fed and positive surprises from the UK data could propel GBP higher. However, a hawkish Fed stance and weak UK GDP figures could see GBP resume its downward trajectory. The price action around the 20-SMA and the upcoming GDP releases will be crucial in determining the near-term direction of GBPUSD.
Sources: TradingView, Trading Economics, Reuters, Bloomberg.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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