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Basic background of the British pound
The British pound will enter 2024 on a relatively strong footing against the US dollar, following a “dovish” market reaction to the Fed’s more accommodative message in the last FOMC announcement. Having said that, the latest UK data shows a significant change in inflation trends, with both headline and core inflation indicators falling sharply. Until then, the UK had been touted as a frontier economy with higher inflation than developed markets.
The Bank of England (BoE) now has the more complex task of deciding when to cut interest rates without shocking the economy or reigniting inflationary pressures. The market currently expects the first rate cuts to begin in May 2024 (see table below), with cumulative rate cuts of around 134bps by year-end. If the decline in inflation persists, the first round of cuts could be brought forward as early as February.
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Bank of England interest rate probability
Source: Refinitiv, prepared by Warren Venketas
From a USD perspective, the market’s near-automatic reaction to dovish Fed Chairman Jerome Powell may be too early. Given external risk factors such as wars in Ukraine and Gaza, even the slightest escalation could unleash the dollar’s safe-haven appeal. Federal funds futures suggest a 150 bps rate cut by December 2024, a forecast that has drawn pushback from some Fed officials. Risks to current pricing are biased toward a contraction in the easing cycle, which could ultimately lead to a decline in GBP/USD.
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|
change |
long |
shorts |
OI |
| every day | -1% | -2% | -1% |
| weekly | -1% | -3% | -2% |
GBP/USD technical analysis
You can see the weekly GBP/USD price action below tentatively testing the 200-week moving average (blue) after the mid-July 2023 breakout failed. I believe that we will eventually see a breakthrough above this level, but it may not be that soon. As Q1. That said, incoming data is of paramount importance, and if conditions close to the above are confirmed, it could trigger a continuation of the recent bull market.
GBP/USD weekly chart
Source: TradingView, created by Warren Venketas
Cable’s consolidation around the swing high of 1.2746 indicates a bearish/negative divergence as the Relative Strength Index (RSI) gradually declines from overbought territory. I don’t expect much movement in the first quarter, but the market should pull back a bit in the first half of the quarter and then settle to current levels towards the second half of the quarter.
GBP/USD daily chart
Source: TradingView, created by Warren Venketas
Main resistance levels:
Main support levels:
- 1.2500/200 day moving average line (blue)
- 1.2400/50 day moving average (yellow)
