The GBP/USD currency pair has experienced a notable loss of momentum, hovering around the 1.3485 mark during the early European trading session on Monday. This decline is largely attributed to a resurgence in demand for the US Dollar (USD). However, analysts suggest that significant downward movement for this major currency pair might be limited. This is largely because the Bank of England (BoE) has indicated that its monetary policy is set on a gradual loosening path.
In its most recent meeting in December, the BoE’s Monetary Policy Committee made a decision to cut the benchmark interest rate by a quarter point to 3.75%, marking the first reduction since August of the previous year. BoE Governor Andrew Bailey mentioned in a press conference that while a gradual decrease in rates is anticipated, future cuts will depend on various factors, and “how much further we go becomes a closer call” as the committee progresses.
On the other side of the Atlantic, traders are projecting two potential rate cuts from the US Federal Reserve (Fed) by 2026, driven by a cooling labor market and easing inflation. Financial markets currently suggest an approximately 18.3% likelihood that the Fed will lower interest rates at its next policy meeting in January, according to the CME FedWatch tool. Should these dovish expectations for the Fed materialize, it could exert downward pressure on the USD, potentially creating favorable conditions for the GBP/USD pair in the near term.
From a technical standpoint, the GBP/USD is trading at approximately 1.3486. The 100-day exponential moving average (EMA) shows an upward trend, and the price remains above this average, affirming a medium-term bullish trajectory. Any potential pullback in the GBP could find support at the 100-day EMA, thus sustaining the broader uptrend. The Relative Strength Index (RSI) currently sits at 66, indicating robust momentum without breaching overbought territory.
Initial support levels are identified at the Bollinger middle band, currently at 1.3393, with the 100-day EMA positioned just below at 1.3336. Holding above this support zone would likely contain downside risks and maintain an upward bias. The Bollinger Bands have begun to drift higher, with current price action located in the upper half as it approaches the upper band at 1.3547. This suggests continuous bullish sentiment in the market, although the bands have widened slightly in recent sessions, indicating firm momentum.
A sustained close above the 1.3547 threshold could pave the way for further gains, while rejection at these levels might lead to consolidation towards the lower band at 1.3240, presenting a critical juncture for traders.
Additional context on the Pound Sterling reveals that it is the United Kingdom’s official currency and the oldest currency in continuous use, dating back to 886 AD. It ranks as the fourth most traded currency globally, representing 12% of all forex transactions, with key trading pairs including GBP/USD, GBP/JPY, and EUR/GBP.
The value of the Pound Sterling is significantly influenced by the monetary policy set by the Bank of England, which aims to maintain price stability with a target inflation rate around 2%. Adjusting interest rates is the primary tool utilized to achieve this goal. When inflation rates soar, the BoE tends to raise interest rates, enhancing GBP’s appeal to global investors. Conversely, low inflation may prompt the BoE to lower rates in an effort to stimulate economic growth.
Economic health indicators such as GDP, manufacturing and services PMIs, and employment figures can also play a crucial role in determining the Pound’s value. A thriving economy typically bolsters the currency, while poor economic data can lead to a decline in the Pound’s strength. Additionally, the Trade Balance—a metric detailing the difference between export earnings and import expenditures—significantly impacts the currency as well; a positive Trade Balance typically strengthens the currency due to increased foreign demand for exports, while a negative balance has the opposite effect.
