On Wednesday, GBP/USD traded just under the 1.3400 mark, gaining about 0.25% as it edged closer to the 200-day exponential moving average (EMA). This EMA is significant as it has absorbed the gains following a steep drop in mid-June. The pair has bounced back from the 1.3150 range over the past two weeks, but it seems to have hit a ceiling it can’t quite surpass, while firmly holding onto a certain lower limit.
Imported inflation shock addresses labor issues
The pound’s strength stems not from internal factors. A recent U.S. military action targeting Iran resulted in a spike in oil prices—over 6%—which has led to tighter expectations regarding the Bank of England’s (BoE) policies. The market is currently anticipating a 25 basis point interest rate hike by year’s end, a significant move from previous expectations where there was about a 75% chance when President Trump made his announcement. The probability of a rate hike in November is also trending positively. With two members already deviating from the June decision to maintain a 3.75% rate, the hawkish side needs only a sustained energy crisis, which the Strait of Hormuz seems to be providing daily.
This higher-level trap demonstrates a conflicting situation, as the same shock also negatively impacts the real economy. With services inflation sitting at 3.7%, which the central bank can’t overlook, the Services Purchasing Managers Index (PMI) is below the neutral mark of 50, employment figures are declining, and wage growth has slowed to 3.4%. The central bank’s involvement in the contracting services sector does not bode well for the currency in the long run, prompting traders to price both dynamics concurrently.
In the financial stability report released on Tuesday, while highlighting the system’s overall resilience, there was little acknowledgment of increasing leverage, inflated valuations, and the risks posed by cyber threats. The governor has already dismissed the idea of cutting interest rates in the near future, even admitting that achieving the 2% inflation target is taking longer than expected. Interest rate markets seem to interpret this as a green light for ongoing rate hikes, which likely explains why currencies linked to contracting services sectors are seen trading at three-week peaks.
The dollar side remains firm
The minutes from Wednesday’s Federal Open Market Committee (FOMC) meeting came out at 18:00 GMT, but currency pairs hardly budged, showcasing a lack of market reaction. The findings revealed a divided committee, with various members predicting different outcomes for fund rates by year-end. The dot plot for June indicated nine projected rate increases, eight pauses, and one possible cut, while the new chairman has effectively eliminated forward guidance. This quiet discord doesn’t alter pricing but reinforces the demand for dollars amidst inflation indicators.
With the bank rate at 3.75% and the Federal Reserve’s range sitting between 3.50% and 3.75%, there’s not much of a yield gap in cable trading, which means trends often rely on the news cycle and positioning. British politics is rife with developments. Andy Burnham is seen as a likely successor to Keir Starmer, possibly taking up the role by mid-July, though no prime minister has been confirmed, with Ed Miliband’s name surfacing. Plans for a structured transition from the current leadership add another layer of complexity, stalling progress.
A quiet calendar keeps things stable
Looking ahead, on Thursday, the Bank of England’s Deputy Governor will deliver a speech at 9:30 GMT, followed by new U.S. unemployment claims expected to reach 218,000 at 12:30 GMT. Neither event is expected to disrupt the 200-day EMA. Growing scrutiny began building with the release of U.S. consumer price index (CPI) data starting July 14, encompassing growth, employment, and inflation metrics relevant for the U.K. This data will be examined closely ahead of policy decisions from both the Fed and BoE at the month’s end. Until something forces movement in this market, consolidation seems to be the prevailing strategy, and everyone seems to know it. Momentum sits mid-range, oscillating in a increasingly tight band below the moving average.
This week, GBP/USD fluctuates about 50 pips below the moving average. Such stubborn compression is often resolved through sharp moves rather than smooth transitions. Unfortunately for both parties involved, there appears to be no substantial triggers on the calendar until July 14, which leaves the market vulnerable to negative news and shifts in dollar sentiment.
GBP/USD technical levels to watch
Resistance: The 200-day EMA sits just under 1.3400, with a level at 1.3450 behind it and 1.3500 further above. The pair hasn’t crossed this area since it fell from May’s high around 1.3650.
Support: The 50-day EMA offers support within the 1.3350-1.3400 range, holding above 1.3300 and the June reference point of 1.3150.
Bias: The outlook is bullish only if the end-of-day closing price exceeds 1.3400. Until the 200-day EMA fails to hold, any rebound will likely retreat to the 1.3350 area, and a breach below 1.3300 could flip the momentum toward a bearish trajectory back to June’s base.
