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GBP/USD Rebounds but UK Policy Uncertainty Remains a Risk

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GBP/USD OUTLOOK:

  • GBP/USD bounces off technical support and resumes its recovery on Tuesday
  • Broad-based U.S. dollar weakness bolsters the British pound
  • Despite today’s moves, uncertainty about the UK’s fiscal-monetary policy mix will remain a headwind for sterling in the near term

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GBP/USD rallied on Tuesday after bouncing off key technical support in the overnight session, rising around 0.7% to 1.1138 at the time of writing, supported by, among other things, broad U.S. dollar weakness in the FX space, but gains were likely capped by a lack of faith in the UK’s new Prime Minister.

While turbulence in UK markets has subsided to a certain degree after the Bank of England began intervening to preserve financial stability and the government backtracked on a controversial plan to slash the top tax rate that would have sent the deficit soaring, confidence has been damaged, with speculators turning increasingly bearish on the British pound.

From a fundamental standpoint, uncertainty about the UK’s fiscal-monetary policy mix will remain a headwind for sterling in the near term despite today’s price action, prompting investors to demand a higher risk-premium on UK assets. This should exert downward pressure on cable over time.

Focusing on BoE, the institution has been steadily raising interest rates to curb inflation, but has not kept pace with the FOMC’s fast-and-furious hiking cycle for fear that aggressive tightening could push the economy into a painful recession sooner than expected. The Fed-BoE rate differential, while not substantial, may still constrain the pound.

In terms of technical analysis, GBP/USD has resumed its recovery after bouncing off a key support in the 1.1000 area during Asia’s trading session. If buyers manage to push the exchange rate higher in the coming days, resistance appears at 1.1225, but if the pair breaches this area, we could see a move toward 1.1375.

On the other hand, if sellers regain decisive control of the market and trigger a bearish reversal, the first support to take into consideration lies around the psychological 1.1000 handle. If this region is broken on the downside, bears could launch an attack on 1.0920, followed by 1.0775.

Recommended by Diego Colman

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GBP/USD TECHNICAL CHART

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GBP/USD Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX

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