- GBP/USD has risen over 0.3% in the last four sessions, a marginal, but significant gain in a market dominated by strong US dollar fundamentals
The British pound recently made a strong move against the US dollar, climbing over 0.3% in the last four sessions and briefly getting above 1.3300 for GBP/USD, a one-week high. This bounce comes after a sharp fall, dropping from nearly 1.36 in late August to around 1.3200-1.3210 by late September.
Market participants are now watching to see if this climb means a real shift in the trend or just a short break before prices fall again.
What Is Supporting GBP/USD Recovery?
A few things are helping GBP/USD bounce back. For one, the US dollar is weaker. Federal Reserve official Williams, for example, hinted he’d only back one more 0.25% rate hike. That news quickly dropped the market’s expected chance of an October increase, going from about 70% to 45% in a single day.
Cooler US inflation numbers, especially the PCE figures, also helped calm expectations for a Fed hike in October.
Meanwhile, revised UK second-quarter Gross Domestic Product (GDP) data showed growth was stronger than first thought, rising to 0.5% instead of the earlier 0.4%.
This better growth figure has raised expectations of further hikes from Bank of England (BoE). Money markets now see an 80% or higher chance of a 25-basis-point rate increase at the BoE’s November 5th meeting, quite a jump from what was expected before.
Near-Term Risks Remain
Even with these recent gains, technical and fundamental indicators suggest it’s wise to be careful, as big challenges are still out there. The Federal Reserve has already moved rates to 3.75%-4.00% and keeps hinting it’s prepared to tighten more if inflation doesn’t cool down. US 10-year yields, trading at levels not seen since 2007, continue to bolster the dollar.
Upcoming economic data like US non-farm payrolls and inflation reports could quickly revive expectations of an October Fed hike. That could easily wipe out sterling’s recent gains.
Higher oil prices, stemming from stalled talks on reopening the Strait of Hormuz, also make further Fed tightening seem more likely. This has boosted demand for the dollar as a safe haven. If those talks don’t succeed, oil prices might climb even higher, worsening inflation worries and likely strengthening the dollar.
Technically, the GBP/USD pair hasn’t held above 1.3300. While support near 1.3200 has held up so far, a clear break below that could send it dropping toward 1.3140 or maybe 1.3100. On the other hand, if it moves and holds above the 1.3350-1.3400 range, that’d build a stronger case for a bigger recovery.
How likely is a Bank of England rate increase in November?
Markets currently assign an 80% or higher probability to a 25-basis-point hike at the 5 November meeting following the GDP revision.
The pound’s recent strength against the dollar could easily reverse. That would happen if a strong US jobs or inflation report makes a late-October Fed hike look very probable once more.
