GBP/USD in a Tough Spot Despite Room for More BoE Hikes


GBP/USD Analysis

The pair is having a strong 2023 and hit the highest levels in more than a year at the start of the third quarter, with monetary policy differential being the main driver of the advance. Inflation in the US has been coming down and the Fed has slowed down the pace of tightening this year, while markets believe rates have peaked. However, Chair Powell has kept the door open to more hikes, as the economy performs very well and the labor market remains hot. The US Dollar has strengthened as a result over recent weeks, as markets come to terms with the higher-for-longer prospects and push back rate cut expectations.

The Bank of England on the other hand, has been raising rates non-stop, as the cost of living remains high, having delivered 515 basis points of hikes since the December 2021 lift-off. Last week's inflation and wage data keep pressure for more tightening. Although headline CPI decelerated further in July, it remains high and core is persistent, while regular pay rose to new historic highs.

However, the British pound now struggles to elicit strength from this theme, as fears mount that the BoE may break something in its effort to contain the high cost of living. Along with its non-committal stance and the higher-for-longer prospects from the Fed, GBP/USD runs a losing August, which brings it to precarious position.

The pair has stayed below the EMA200 (black line) and the 38.2% Fibonacci of the recent drop, which creates scope for lower lows (1.2615). This would expose it to the 200Days EMA (at around 1.2480), but we are still cautious for more losses that would breach this level.

Despite this month's weakness, the pair shows resilience and has the ability to take another crack at 1.2817. Daily closes above it could shift immediate bias to the upside, but the daily Ichimoku Cloud (up to 1.2930) can contain recovery efforts.

Global monetary policy is at crossroads as central banks assess the effects of their massive tightening cycles, creating uncertainty around the next steps. The Fed and the BoE are at the epicenter, since they have kept their options open and their actions will be crucial for the GBP/USD trajectory.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

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