GBP/USD Challenges 1.2750 Level: UK and US Policies Key Factors.
GBP/USD remains within the narrow range of 1.2600 -- 1.2825, and whether it can break through the 1.2750 level depends on interest rate decisions and forward guidance, while the policy decisions of the Federal Reserve and the Bank of England (BoE) will play a crucial role in whether this narrow range can be breached.
The pound is currently one of the top-performing G10 currencies, alongside the US dollar, benefiting from expectations that the BoE will be more cautious than the Fed and the ECB, especially as signs of improving inflation backdrop make it more difficult to maintain a 'higher for longer' interest rate stance. This is particularly in light of some tentative evidence of a moderate pick-up in domestic demand conditions in the UK.
Last week's UK data was broadly encouraging and helped support the pound.
While still in contraction, the UK's manufacturing PMI index saw a moderate recovery to a 9-month high, and the services sector reported stronger growth for the month, reaching an 8-month high.
December government borrowing data came in lower than expected, sparking discussions about more significant tax cuts, and the latest GfK consumer confidence index further recovered to a 2-year high.
However, retail spending remains a notable weak spot, with the CBI retail sales survey deteriorating further to a 3-year low. If retail sales continue to be under pressure, spending on services will be crucial for the overall economic performance and the BoE's assessment of the economy.
The BoE is expected to remain cautious and may not rush to adjust rates. Market expectations for a 25bps rate cut in May could be delayed until June or even August.
The US recorded annualized GDP growth of 3.3% for the fourth quarter of 2023, higher than the consensus forecast of 2.0%. Data continues to show the resilience of the US economy, and the US economy may achieve a controlled landing with lower inflation. However, there is a risk of a hard landing, and the Fed's rate decisions may not meet market expectations, meaning if the Fed is unable to deliver rate cuts or cuts fewer than anticipated, this would weaken the pound. Higher rates and weaker equities are both bearish for GBP/USD.
GBP/USD may continue to experience volatility in the short term, especially in the context of the BoE meeting and Fed policy updates. Close attention should be paid to the outcomes of the BoE and Fed meetings, as well as key economic data from the UK and US. Considering market volatility, a flexible trading strategy is recommended, focusing on short-term technical indicators and fundamental changes.
The pound is currently one of the top-performing G10 currencies, alongside the US dollar, benefiting from expectations that the BoE will be more cautious than the Fed and the ECB, especially as signs of improving inflation backdrop make it more difficult to maintain a 'higher for longer' interest rate stance. This is particularly in light of some tentative evidence of a moderate pick-up in domestic demand conditions in the UK.
Last week's UK data was broadly encouraging and helped support the pound.
While still in contraction, the UK's manufacturing PMI index saw a moderate recovery to a 9-month high, and the services sector reported stronger growth for the month, reaching an 8-month high.
December government borrowing data came in lower than expected, sparking discussions about more significant tax cuts, and the latest GfK consumer confidence index further recovered to a 2-year high.
However, retail spending remains a notable weak spot, with the CBI retail sales survey deteriorating further to a 3-year low. If retail sales continue to be under pressure, spending on services will be crucial for the overall economic performance and the BoE's assessment of the economy.
The BoE is expected to remain cautious and may not rush to adjust rates. Market expectations for a 25bps rate cut in May could be delayed until June or even August.
The US recorded annualized GDP growth of 3.3% for the fourth quarter of 2023, higher than the consensus forecast of 2.0%. Data continues to show the resilience of the US economy, and the US economy may achieve a controlled landing with lower inflation. However, there is a risk of a hard landing, and the Fed's rate decisions may not meet market expectations, meaning if the Fed is unable to deliver rate cuts or cuts fewer than anticipated, this would weaken the pound. Higher rates and weaker equities are both bearish for GBP/USD.
GBP/USD may continue to experience volatility in the short term, especially in the context of the BoE meeting and Fed policy updates. Close attention should be paid to the outcomes of the BoE and Fed meetings, as well as key economic data from the UK and US. Considering market volatility, a flexible trading strategy is recommended, focusing on short-term technical indicators and fundamental changes.