The GBP/USD currency pair is currently exhibiting a persistent downtrend, consolidating around and below the 1.2500 support level, signaling a firmly established bearish market sentiment. This behavior suggests that the selling pressure is likely to continue, further influenced by the ongoing strength of the US Dollar. In recent trading activity, the pair experienced a decline to 1.2475, marking its lowest point in seven months, before finding a temporary equilibrium around 1.2530. This movement occurred ahead of the release of the weekly US jobless claims data and against the backdrop of the British Christmas holiday.
UK Economic Performance
Recent economic data reveals that the United Kingdom’s Gross Domestic Product (GDP) remained stagnant in the third quarter of 2024, failing to reflect the previously anticipated growth of 0.1%. Additionally, there was a minor downward revision for the second quarter, although the annual GDP growth held steady at 0.9%. While the construction sector demonstrated some expansion with a 0.7% increase in output, this was counterbalanced by a 0.4% reduction in manufacturing output, and the service sector did not grow during this period. The Centre for Economics and Business Research has indicated that the revisions to this data underscore the challenges that the UK economy is encountering with regard to growth. These findings are likely to present a challenge for the new government that has prioritized economic growth. The Centre consequently projects GDP growth of 0.9% for the current year and 1.3% for the upcoming year, 2025. Furthermore, financial markets have factored in expectations of two interest rate reductions by the Bank of England during 2025.
UK Equity Market Rebound
The UK equity market, represented by the FTSE 100 index, demonstrated resilience in recent trading. The index closed 0.5% higher at 8140 in Tuesday’s session, building on the previous session’s recovery. This growth was broad-based, with significant gains seen in the shares of major financial institutions, energy companies, and mining operations, such as HSBC, Shell, and Glencore, nearing a 1% increase. AstraZeneca’s share price however closed near to flat. Conversely, construction companies experienced a downturn, particularly with Vistry seeing a 16% decrease outside the FTSE 100, triggered by another profit warning. It’s worth noting that the London Stock Exchange was closed for the Christmas and Boxing day holiday period and will resume trading on Friday. The FTSE 100 is on track to end the year with a gain exceeding 5%, which is the fourth consecutive annual rise and the largest since 2021. This performance contrasts with the gains observed in the US equity market as well. The Dow Jones Industrial Average rose 177.64 points to 43,084.59, the S&P 500 index climbed 43.11 points to 6,017.18, and the Nasdaq Composite increased by 210.74 points to 19,975.62.
Trading Considerations
The GBP/USD pair is expected to remain under downward pressure. This trend will likely persist until there is more certainty regarding the policy direction of the current administration and other policy drivers as well as the central banks’ strategy for the upcoming year. Speculative trading should take this into consideration.
Technical Analysis
From a technical perspective, the GBP/USD pair currently presents a bearish outlook. The pair’s consolidation around the 1.2500 support level solidifies the bearish trend with the possibility of further downward movement until technical indicators, such as the Relative Strength Index (RSI) and the Stochastic oscillator, reach oversold territory. As such, it’s likely that the bears will target the 1.2460 and 1.2350 support levels as logical targets. Reversal of this trajectory requires a move above the 1.2850 resistance on the same timeframe, although such a move does not seem to be in the immediate horizon. Until trading resumes with full volume, performance is expected to be within tight ranges.
Conclusion
The GBP/USD pair is currently navigating through a period of bearish momentum, characterized by the continued dominance of selling pressure. The British economy is facing challenges and is not growing as hoped, while the continued strength of the US dollar also drives much of the pair’s current movement. The technical analysis of the pair also signals further potential weakness. Investors and traders should therefore adopt a cautious approach, closely monitoring both economic indicators and market signals while factoring in the anticipated low volatility environment over the holiday period. While the UK stocks appear to be showing some rebound this has very limited correlation to the pair’s movement at the moment.
FAQs
Q: What is driving the current bearish trend in the GBP/USD pair?
A: The bearish trend is mainly driven by the strength of the US dollar and persistent economic weakness in the UK. Technical indicators also suggest the continuation of this downward trajectory.
Q: What are the key support levels to watch for the GBP/USD pair?
A: Key support levels to watch include 1.2460 and 1.2350, which are the next targets according to our analysis
Q: How might central bank policies affect the GBP/USD pair?
A: Central bank policies, particularly from the Bank of England and the Federal Reserve, will heavily influence the pair. The market is anticipating interest rate cuts by the Bank of England which will likely further depress the pair. Conversely, the US Federal Reserve’s policies that show continued strength will continue to push down the GBP/USD pair. Investors will need to monitor these central banks policy changes for the best insight.
Q: Is there a possibility of a bullish reversal soon?
A: A bullish reversal would require significant positive momentum, including a break above the 1.2850 resistance and improved economic data from the UK, as well as central bank changes. Currently such factors are not present.
References
DailyForex.com
Centre for Economics and Business Research