The pound has bounced back from its long-term support level, which has been tested around seven-month lows, and moved closer to a group of moving averages. Honestly, this situation reflects more of what’s going on with the dollar than anything directly tied to the pound. The recent upswing for the pound seems largely due to weak US job statistics rather than a newfound strength in the British currency. With the current government in disarray, there’s really been little discussion about any lasting appreciation of the pound.
The dollar’s pullback
The main driver in this scenario is definitely the US economy. Nonfarm payrolls (NFP) for June came in at just 57,000, far below the anticipated 110,000. This sparked renewed skepticism about any tight monetary adjustments by the Federal Reserve, leading to a weaker dollar overall. Therefore, GBP/USD is not initiating this change; rather, it’s benefiting from the dollar’s decline. The support level for the pound held this week thanks to shifts in the dollar, not because there was a wave of demand for the pound itself.
Uncertainty in Westminster
The political backdrop is what transforms a normal dollar-driven rise into what feels like a constrained one. Prime Minister Keir Starmer stepped down in late June, setting off a competition for leadership within the Labor Party. Currently, Greater Manchester Mayor Andy Burnham is seen as the main contender, capturing much of the market’s attention. Concerns surrounding fiscal stability regarding spending and taxation have raised the political risk premium for Sterling. Burnham’s calls for fiscal restraint have dampened some enthusiasm, but the lack of a central bank leader ready to promise further rate hikes creates an unstable base for a lasting bullish trend.
Banks help maintain stability
The Bank of England (BoE) also plays a crucial role in supporting the pound. Interest rates remained steady at 3.75% after a split in the Monetary Policy Committee (MPC) showed some hawkish tendencies. Although the Governor maintains a cautious stance without hinting at immediate rate cuts, some committee members are still vocal about potential tightening. The markets are pricing in some chance of a rate increase at the upcoming meeting on July 30. While there’s genuine support for yields, the previous clear-cut policy divergence favoring the pound is now evolving as US economic data has softened, narrowing the interest rate differentials.
Next week is distinctly American.
The short-term test will come with the Bank of England Governor’s speech on Friday at 15:00 (Japan time). A continuation of the dovish tone may limit any pullbacks right before reaching the moving average cluster. Meanwhile, US markets will be closed on Friday for Independence Day, so next week’s events will be primarily US-focused. The Institute for Supply Management (ISM) services survey will be released on Monday at 14:00 GMT. Later, at 6 PM GMT on Wednesday, the minutes from the Federal Open Market Committee (FOMC) will provide insights against a backdrop of softer data. Weekly unemployment insurance claims data will follow on Thursday. Domestic information sources will be limited to central bank commentary and Tuesday’s Financial Stability Report, meaning the pound’s direction in the short term still hinges more on US data rather than UK developments.
Key levels to watch
Resistance: The recovery is encountering resistance at the moving averages overhead, with the 50-period exponential moving average (EMA) around 1.3350 and the 200 EMA near 1.3400. Currently, momentum appears to be rebounding as the Stochastic Relative Strength Index (Stoch RSI) shifts from oversold to upward. If the day closes above the moving average range, there could be a pathway to levels around 1.3450 and eventually 1.3500.
Support: The long-term support line around 1.3200 is essential to the overall market setup and has been defended during previous dips. There’s an intermediate support at 1.3300 just above it, which could act as a minor checkpoint in any rebound. A daily close below 1.3200 would open up moves toward 1.3150 and then 1.3100, indicating that any dollar-led rally has faltered.
Bias: The immediate trajectory points toward the 1.3400 area; however, the firm support at 1.3200 persists. This rise is stemming from a weaker dollar rather than a robust pound, meaning it’s quite dependent on US data. A definitive break below 1.3200 would shift bias towards 1.3150. Given how this scenario is unfolding, it’s definitely worth closely monitoring the US releases next week.
