GBP/USD Forecast: Pound Eyes $1.34 Breakout as Fed Cut Bets Weaken Dollar
The British Pound bounced back to life on Wednesday morning, ending a 2 day slide as the US Dollar looked to be weakening...
Quick overview
- The British Pound rebounded on Wednesday as the US Dollar weakened, with a 94% chance of a Federal Reserve interest rate cut in October.
- Federal Reserve officials are hinting at potential rate cuts due to a slowing labor market and economic uncertainty from the US Government shutdown.
- Despite the short-term gains, the British Pound faces challenges from a slowing UK labor market, which may lead to a Bank of England rate cut later this year.
- GBP/USD is currently testing a key resistance level at $1.34, with a bullish outlook if it closes above this mark.
The British Pound bounced back to life on Wednesday morning, ending a 2 day slide as the US Dollar looked to be weakening – and a cut in interest rates from the Federal Reserve seems to be on the cards. We now see a 94% chance of a rate slash in October, and 93% in December, according to the CME FedWatch tool.
Federal Reserve chief Jerome Powell has hinted that a further cut might happen this month, pointing to a slowing labour market and general uncertainty about the economy caused by the ongoing US Government shutdown. Boston Fed president Susan Collins nodded in agreement, pointing out that even while the cuts take place, the policy may still remain restrictive – and that’s a sign that the central bank is taking things at a gentle pace.
Markets are keeping a close eye on what the Fed’s Stephen Miran, Christopher Waller and Jeff Schmid – all have to say in speeches this week – as they look to figure out the timing and pace of any future policy shifts.
GBP/USD Pound Still Struggling – Despite a Weaker Dollar
The weaker dollar is certainly helping pound come back up in the short term – but the British Pound has its own problems to worry about too. The UK Labour market has been slowing down and that has led markets to think that the Bank of England may have to cut interest rates later this year – by about 46 basis points. This slowdown in hiring and wage growth is a sign the economy is getting a bit soft – which may cap the GBPs gains.
Investors are going to be keeping a close eye on what the Bank of England has to say this week, looking to see how they plan to balance their worries about inflation with the risk of economic stagnation. Any particularly dovish comments could make the pound a bit riskier, especially if the Fed sticks to its plan to take things slow.
GBP/USD Technical Outlook: It’s All About That $1.34 Level
GBP/USD is currently trading at $1.3355 and showing a bit of caution as it tries to get past a resistance line that has been blocking it since late September. The pair is generally in a downtrend, but it has managed to put in some higher low prices around $1.3260 – which is a bit of a sign of recovery.
$1.3407 is a key level at the moment – the 100 period moving average is sitting right there – and as long as the pound stays below that, it may not be able to make much progress. A close above $1.3400 could be a signal that the trend has turned in the pound’s favour though – and that could open the way to even higher prices – we’re talking $1.3444 and $1.3529.
What’s also worth noting is that the pair put in a bit of a bullish engulfing pattern down at the lower end of its range – followed by a spinning top candle, that’s a bit of a sign of short term indecision before it decided to go up. The RSI is sitting at 57.5 just now – that’s a sign of improving momentum without getting too overbought – which is good news for the pound.
Trade Setup Highlights:
- Entry Zone: Go long when you see a confirmed breakout above $1.3400
- Targets: $1.3440 and $1.3520
- Stop-Loss: Below $1.3250, dont risk more than you can afford to
- Bias: We’re slightly bulllish as long as its over $1.3300
Summary
As investors try to get to grips with the fact that the Fed and the BoE are going in opposite directions with their interest rates – the GBP/USD remains in a bit of a tight spot but is leaning in a generally bullish direction. A close above $1.34 could be a sign that the pound is ready to take off – and that the dollar’s momentum is starting to slip.
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