GBP/USD Climbs to 2024 High as BoE Rate Cut Expectations Wane After Strong UK PMIs
The GBP/USD pair surged to a fresh 2024 high of 1.3129 on Thursday, fueled by better-than-expected UK flash PMI data for August. The stronger-than-anticipated economic performance has led markets to reassess the Bank of England’s (BoE) potential rate cut trajectory, with some now expecting the central bank to delay or slow down the pace of cuts. This shift in expectations has provided a significant boost to sterling, with traders now targeting the July 2023 peak at 1.3144 as the next key resistance level.
Despite the BoE’s rate cut on August 1, sterling has demonstrated considerable strength, gaining 3.1% year-to-date and rebounding by 3.67% from its August 8 low. The rally from the post-cut lows has been supported by a significant unwinding of speculative long positions in the GBP, with IMM contracts falling from a record high of +142k on July 23 to +47k as of August 13. This reduction in long positions may have cleared the way for the recent recovery, particularly as the upbeat PMI data suggests a shift in the driving forces behind sterling’s strength. Initially, the pound’s strength was linked to high rates due to inflation concerns, but there now appears to be a growing narrative of high rates being supported by economic growth, hinting at a possible soft landing for the UK economy.
On the technical front, GBP/USD is in a robust uptrend, with the July 2023 high at 1.3144 serving as the next major resistance level. A successful break above this level could see the pair extend its gains towards the March 2022 weekly highs at 1.3181 and 1.3299. The pair’s upward momentum is further supported by bullish technical indicators, including a rising Relative Strength Index (RSI) and the pair’s ability to hold above key moving averages.
However, as the New York session progressed, GBP/USD retreated slightly to 1.3083, down 0.07% for the day. This pullback coincided with a rise in U.S. Treasury yields and a tempering of expectations for aggressive rate cuts by the Federal Reserve ahead of Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole symposium on Friday. Current market pricing, as reflected by the IRPR, indicates a 24% probability of a 50bps cut in September, with a total of 96bps of cuts expected by year-end. Meanwhile, the BoE is seen with a 28% chance of a 25bps cut in September and an additional 40bps of cuts by the end of the year.
Key support levels for GBP/USD include the Thursday low at 1.3081, followed by the 55-hour moving average at 1.3058, and the 23.6% Fibonacci retracement of the 1.2666-1.3130 rally at 1.3020. As long as the pair remains above these levels, the bullish outlook remains intact, with potential for further gains if Powell’s speech does not deliver a more hawkish message than anticipated.
In conclusion, GBP/USD has reached a new 2024 high on the back of strong UK PMI data and shifting expectations regarding BoE and Fed rate policies. While the pair has encountered some near-term resistance, the broader uptrend continues, with the July 2023 peak and higher levels within reach if market dynamics remain supportive.
