GBP/USD Climbs to 1.3195 Amid Fed Rate Cut Speculation: Key Levels to Watch

The GBP/USD pair has seen a strong bullish trend during Monday’s European session, reaching $1.3195 at its peak. This surge in the pair is driven primarily by speculation that the Bank of England (BoE) will take a more cautious approach to policy changes compared to the U.S. Federal Reserve (Fed).

Meanwhile, the U.S. Dollar Index (DXY), which tracks the dollar against a basket of major currencies, remains close to its year-to-date lows, further supporting the Pound’s rise.

In this article, we explore the drivers behind GBP/USD’s recent performance, analyze the impact of central bank policies, and highlight key technical levels to watch.

#GBPUSD: tested 1.3150, but not able to break thru; If this happens, the target is 1.3265; The key level above 1.3150 is 1.3200; Till this breaks, Sell on Rise- this changes IF 1.3200 breaks;IF 1.3150 holds, then the support is @ 1.2978; BoE rate decision & the statement is Key pic.twitter.com/YkKMJ0gHH8

— rajesh kazhipurath (@RajeshKaz) September 16, 2024

1. U.S. Dollar Weakness Fuels GBP/USD Rise

Fed Rate Cut Expectations Drive Dollar Lower

One of the primary reasons for the recent rise in the GBP/USD pair is the broad-based weakness of the U.S. The U.S. Dollar Index (DXY), currently near its lowest level of the year, has been under significant pressure as traders bet on the possibility of aggressive policy easing by the Federal Reserve.

According to the CME FedWatch Tool, the probability of the Fed cutting interest rates by 50 basis points (bps) later this week has surged to 61%, up from just 30% a week ago.

This shift comes as inflationary pressures in the U.S. continue to ease, with the Producer Price Index (PPI) for August showing a larger-than-expected drop to 1.7%.

GBPUSD Technical Analysis – The pair bounces on a key support

Fundamental Overview

The bullish momentum in the USD is starting to fade as Treasury yields continue to fall. We had two possible catalysts yesterday.

The first one was the much weaker than expected US NFIB Index… pic.twitter.com/SIfwLOtrtv

— Giuseppe Dellamotta (@DellamottaGM) September 11, 2024

With U.S. Treasury bond yields hovering near their 2024 lows, the dollar’s appeal as a safe-haven asset has diminished, further bolstering the GBP/USD pair.

The market’s belief that the Fed will act more aggressively than the Bank of England has led to a strong rally in the British Pound, as investors anticipate a more favourable interest rate differential.

Diminished Safe-Haven Appeal of the U.S. Dollar

Additionally, the broader positive sentiment across global financial markets has reduced the need for investors to flock to safe-haven assets like the U.S. Dollar.

With market participants pricing in a substantial Fed rate cut, the dollar’s value has been on the decline, allowing currencies like the British Pound to capitalize on this weakness.

2. Impact of Bank of England Policy on GBP/USD

BoE’s Cautious Approach vs. Fed’s Aggressiveness

While the Federal Reserve is expected to pursue more aggressive rate cuts, the Bank of England is likely to be more cautious.

This divergence in policy approaches has contributed to the Pound’s strength. The BoE has already raised interest rates to combat inflation, but the central bank is not expected to match the Fed’s rate cuts in scale or pace.

This less aggressive easing stance supports the British Pound, as it helps maintain higher interest rate differentials compared to the U.S. dollar.

However, there are concerns about the UK’s economic performance. Recent data revealed that UK wage growth has slowed, and GDP growth has remained flat for two consecutive months.

These factors could limit the extent of the GBP’s rise, as investors weigh the risks of slower economic growth against the currency’s recent gains.

Mixed UK Economic Data

Although the overall sentiment around the British Pound remains positive due to expectations of a cautious BoE policy, weak economic indicators could temper enthusiasm.

The UK economy grew by 0.6% between April and June, according to the Office for National Statistics.

Ben Habib: "Basically, we're running a third-world economic model in what used to be a first-world country."@Iromg pic.twitter.com/DQYB2P2I2L

— Talk (@TalkTV) August 15, 2024

For example, the slowdown in UK wage growth and stagnant GDP raise concerns about the UK’s economic outlook. These concerns may lead to caution among traders, limiting the GBP/USD pair’s upside potential.

3. GBP/USD Technical Outlook: Key Levels to Watch

Immediate Resistance and Support Levels

Currently, GBP/USD is trading at $1.31716, up 0.24%, maintaining its bullish tone as it approaches critical resistance levels.

Immediate resistance is located at $1.3209, with further resistance at $1.3238 and $1.3260. The pair remains supported above its pivot point at $1.3158, signalling the potential for further gains.

• Resistance Levels: $1.3209, $1.3238, $1.3260
• Support Levels: $1.3102, $1.3077, $1.3051

Overbought Conditions and RSI

Despite the bullish momentum, caution is warranted as the Relative Strength Index (RSI) currently stands at 67, indicating that the pair is nearing overbought territory. If the RSI continues to rise above 70, it could signal a short-term pullback as traders lock in profits.

$1.3102 provides immediate support, then $1.3077 and $1.3051. The 50-day Exponential Moving Average (EMA) at $1.3094 provides crucial support, reinforcing the broader bullish trend.

Trading Strategy

For traders, the key to navigating the current market is monitoring support and resistance levels closely. As long as the price holds above the pivot point at $1.3158, the bullish outlook remains intact, with buyers looking for an entry point above $1.31585.

Targeting take-profit levels around $1.32059, traders may anticipate testing higher resistance levels if bullish momentum continues.

On the downside, a break below the $1.3102 support level could indicate a reversal, inviting selling pressure toward $1.3077 and $1.3051. Given the potential overbought conditions, traders should also watch for signs of exhaustion in the upward trend.

Conclusion: Will GBP/USD Continue to Rise?

The GBP/USD pair’s recent gains are driven by expectations of a substantial Fed rate cut and a weaker U.S. Dollar. While the Bank of England’s cautious approach to monetary easing supports the Pound, mixed UK economic data could temper enthusiasm.

Traders should remain vigilant, monitoring key technical levels and overbought signals to make informed decisions.

As the market continues to anticipate the Fed’s rate decision, the overall outlook for GBP/USD remains positive. However, potential pullbacks may occur in the near term as traders react to overbought conditions and mixed economic signals from the UK.