GBP/USD. Analysis and Forecast

[Ben Graham]

On the last trading day of the week, the GBP/USD pair is halting yesterday's correction from the area around 1.3440. However, it is still struggling to attract significant buying interest.

The pound is being supported by the Bank of England's recently adopted measures, which have boosted expectations regarding its future policy. Despite the split vote (5–4), the 25-basis-point rate cut to 3.75% is being perceived by the market as a signal of a dovish approach, especially after the unexpected drop in inflation earlier this week. These factors reduce pressure on monetary policy expectations in the UK and trigger a positive reaction from investors.

At the same time, U.S. data that came in below expectations provided support to the GBP/USD pair. The U.S. Bureau of Labor Statistics showed a slowdown in price growth: the headline index rose by 2.7% year-on-year, below the expected 3.1%. Core inflation, which excludes volatile components, was also below forecasts at 2.6%. This news reinforces expectations of further Federal Reserve rate cuts next year.

As a result, dovish Fed expectations are keeping dollar bulls on the defensive, thereby helping the currency pair hold above the key 200-day simple moving average (SMA). This, in turn, confirms the likelihood of further strengthening of the pair.

From a technical perspective, as long as prices remain above both the 100-day and 200-day SMAs, and oscillators on the daily chart remain positive and well away from overbought territory, the outlook for the pair remains constructive. For further upside, prices need to break above the round 1.3400 level, which would open the way toward important resistance in the 1.3440–1.3450 level. Support has been found at the 100-day SMA around 1.3361; a move below this level, as well as below the 200-day SMA, would accelerate a decline toward the round 1.3300 level.

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