GBP/USD Analysis: Will Downward Momentum Persist in Autumn 2023? – R Blog

• The pair is traded round the clock from Monday to Friday, with significant trading volumes during the European and American sessions, leading to major movements
• The currency pair is characterised by high average daily volatility within the range of approximately 1,000-1,300 pips. During times of market force majeure, it has the potential for strong movements exceeding 2,000 pips per day
• The spread for GBP/USD is considered minimal, thanks to its high liquidity, and typically ranges around 10 pips in a calm market

Just like the Bank of England, the US Federal Reserve has been actively combatting inflation by tightening monetary policies. Since 2022, the interest rate in the US has risen from 0.25% to 5.5%. This significantly affected the US dollar, which managed to strengthen considerably against many world currencies.

In July, the Fed raised the interest rate to 5.5%. Comments from Jerome Powell, the chair of the Federal Reserve, suggest that the cycle of interest rate hikes is coming to an end. Experts predict a maximum of two more hikes this year, after which the rate will remain stable for some time and possibly even decrease depending on economic conditions.

The behaviour of the GBP/USD quotes reflects the comparative state of the current economic conditions in the US and the UK. A rise in quotes indicates the strength of the pound and the weakness of the US dollar.

The key factor for the pair’s further movement will be the pace of economic growth in these countries (GDP growth rates). Interest rate hikes exert pressure on the economy, and if there are signs of emerging recession, this will affect currency quotes. Should these indications arise within the US economy, GBP/USD will gain momentum for growth. On the other hand, signals from the UK economy will drive down the currency pair’s quotes.

The GBP/USD currency pair is experiencing moderate growth in 2023 with the daily chart showing a downward correction at the time of writing. The central banks of the UK and US are implementing tighter monetary policies to fight the escalating inflationary pressure. Interest rates currently stand at 5.25% and 5.5% respectively, with neither the pound nor the dollar gaining distinct advantages.

This is the pivotal factor influencing the valuation of the pound sterling in the global currency market. The main tool of the Bank of England, the country’s central bank, to control inflation and affect the national currency exchange rate is the decisions on interest rates. If the interest rate increases, the exchange rate appreciates, while a decrease in the interest rate leads to a decline in the exchange rate.

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GBP/USD is showing a downward correction on the daily chart, moving below the lower boundary of the ascending daily price channel, and forming a Head and Shoulders reversal pattern. The quotes are currently below the figure baseline with a strong resistance area at 1.2620-1.2650 and a support level at 1.2547.

On 1 September, the US will release employment statistics for August, namely the nonfarm payrolls and the unemployment rate. If the data deviates significantly from the projected values, this may lead to increased market volatility and give momentum for further movement of the GBP/USD quotes.

On 2 August 2023, the central bank raised the interest rate by 0.25% to 5.25%. Inflation is far from its target level, which gives good reason for the interest rate to be hiked further. The Bank of England’s decisions in this regard provide support for the pound sterling against other currencies, including the US dollar.