**GBP/USD: Sterling Stuck Between Rate Expectations and US Dollar Demand**
*Original analysis credited to Fawad Razaqzada, Investing.com*
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The British Pound (GBP), particularly in its pairing with the US Dollar (USD), has become a key focus in the global Forex landscape. With traders and investors closely monitoring the shifting tides of monetary policy, inflationary trends, and changing expectations in the two economies, GBP/USD remains arguably one of the most actively traded currency pairs worldwide. Currently, Sterling finds itself caught in a tug-of-war between the evolving outlook for interest rates in the UK and persistent demand for the US Dollar.
This article delves into the complex factors shaping GBP/USD price action, exploring both macroeconomic and technical considerations. By evaluating the Bank of England’s (BoE) policy stance, the relative strength of the US economy, and factors influencing market sentiment, we aim to clarify what’s driving Sterling’s current range-bound behavior and what may lie ahead in the months to come. Credit goes to Fawad Razaqzada for the original analysis.
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## The State of Play: GBP Struggles for Direction
After an eventful 2023 and start to 2024, GBP/USD has entered a phase of consolidation, hovering between key support and resistance levels. Market participants remain cautious, weighing the odds of near-term rate cuts on both sides of the Atlantic and seeking clarity amidst mixed economic signals.
### GBP/USD: A Tight Trading Range
In recent weeks, GBP/USD has:
– Fluctuated primarily between 1.26 and 1.28
– Failed to sustain moves above the upper end of this range, reflecting cautious risk appetite
– Seen repeated rebounds from lower support, indicating residual demand for Sterling on dips
– Lacked conviction to break out due to uncertainties in monetary policy outlook
This behaviour reflects broader indecision in foreign exchange markets as traders try to anticipate which central bank will be the first to pull the trigger on rate cuts, and by how much.
## Core Drivers: Monetary Policy Expectations
### Bank of England: The Inflation Conundrum
The Bank of England finds itself in a delicate balancing act. While the worst of headline inflation has receded from dizzying heights in late 2022 and early 2023, core price pressures remain uncomfortably sticky by historical standards.
– **UK CPI:** Although headline inflation has cooled, core measures (excluding volatile items like food and energy) persist above the BoE’s 2 percent target.
– **Services Inflation:** A particular concern for the BoE, given services make up a dominant share of the UK economy.
– **Wage Growth:** UK average earnings growth remains robust, fueling concerns that inflationary forces are still deeply embedded.
Recent data have prompted the BoE to adopt a more patient, data-dependent wait-and-see approach. Consequently, markets have seen a paring back of aggressive rate cut expectations that were prevalent at the start of the year. Nevertheless, the question remains not so much if, but when, the central bank will begin to ease policy.
#### BoE Rate Cut Expectations
Markets are pricing in:
– The first BoE rate cut in either August or September, depending on evolving data releases
– Approximately 50 basis points of easing by year-end, though expectations have fluctuated with each economic print
– Reluctance by the BoE to move too early, mindful of past experiences where premature easing risked reigniting inflationary pressure
### Federal Reserve: Resilient Dollar Demand
Across the Atlantic, the Federal Reserve finds itself in a similar situation, albeit with its own nuances. The US economy has demonstrated impressive resilience amid elevated interest rates, supported by:
– Strong employment gains
– Steady consumer spending
– Robust GDP growth rates compared to other major developed economies
However, US inflation has proven harder to quell than previously anticipated. The central bank’s preferred gauge, the core PCE deflator, remains above target
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