The British pound is holding modest gains against the US dollar in early European trading on Thursday, with the pair hovering around 1.3387. Against the backdrop of a pullback in the US dollar index, the pound has found near-term support, though a reassessment of the Bank of England's future policy path is keeping the overall currency performance choppy. On the dollar front, the US Dollar Index (DXY) is currently trading near 101.00, slightly lower than the previous session. Despite a recent notable rise in crude oil prices due to heightened energy supply risks in the Middle East, which has increased safe-haven demand, the US dollar has not sustained strength. The primary reasons are improving risk sentiment and investors awaiting the next policy signal from the Federal Reserve.
The market is currently focused on the upcoming monetary policy decision from the Federal Reserve. Investors widely expect the Fed to likely keep interest rates unchanged in the near term, but the future policy path remains dependent on changes in inflation and employment data. If the Fed signals a dovish stance, the US dollar could face further pressure, providing upward momentum for the GBP/USD pair.
On the UK side, the pound's recent performance has been complex. While a weaker US dollar provides support, market expectations for further interest rate hikes from the Bank of England have clearly diminished. Data shows the UK's Consumer Price Index (CPI) year-on-year growth rate fell to 2.6% in June, down from the previous 2.8%, indicating further easing of inflationary pressures.
The decline in inflation reduces the necessity for the Bank of England to continue tightening monetary policy in the short term. The market believes that against the backdrop of inflation gradually returning to target, the Bank of England may maintain the current interest rate level for a longer period rather than continuing to push for rate hikes. A Societe Generale economist stated that their base case forecast remains for the Bank of England to keep the Bank Rate around 3.75% throughout 2026, as policymakers need more time to confirm that the disinflation trend is stable. The institution expects that by early 2027, the Bank of England may gradually confirm that inflation is sustainably falling back to the 2% target and begin an interest rate cutting cycle.
Currently, the market is awaiting UK retail sales data and the preliminary July S&P Global Purchasing Managers' Index (PMI) figures. These economic indicators will help investors assess the UK's economic growth situation and influence the future direction of the pound. From a macro perspective, the GBP/USD pair is currently in a phase intertwined with multiple factors. The dollar's direction is primarily influenced by Fed policy expectations and global risk sentiment, while the pound is affected by UK inflation, economic data, and the Bank of England's policy path. In the short term, the exchange rate may continue to fluctuate around changes in fundamentals.
The daily chart for GBP/USD shows the current price is near 1.3380, having retreated to test support near the 20-day Exponential Moving Average around 1.3320. The pair previously retreated from the upper boundary of a descending triangle near the 1.3540 area, indicating some weakening in upward momentum. The RSI indicator is currently near 50.73, in neutral territory, suggesting buying power has recovered somewhat but has not yet formed a clear breakout signal. Initial resistance above is focused near the 1.3500 trendline area, followed by the July 15 high of 1.3558. A break above 1.3558 could open further upside. Support below is watched at the July 8 low of 1.3320; a break below this area could lead to a further test of the June 24 low of 1.3140.
On the 4-hour chart, the GBP/USD pair has recently maintained a consolidating and corrective pattern. Short-term moving averages are gradually flattening, indicating a temporary balance between bulls and bears. If the price can stabilize above 1.3380 and break through the 1.3500 area, the short-term trend could turn stronger again. If it falls below the support near 1.3320, it may trigger further correction. The current technical structure shows the pound still has a foundation for a rebound, but overhead pressure remains evident.
Key Takeaways
The current rebound in GBP/USD is primarily driven by US dollar weakness rather than a marked improvement in UK fundamentals. The persistent decline in UK inflation has reduced the likelihood of the Bank of England continuing to raise interest rates, leaving the pound without strong policy support. Meanwhile, Federal Reserve policy expectations and changes in global risk sentiment will continue to dominate the dollar's direction. In the short term, GBP/USD may maintain a range-bound but slightly stronger pattern, with the 1.3500 to 1.3558 area becoming a key resistance zone. If UK economic data shows improvement coupled with further US dollar weakness, the exchange rate could challenge higher levels. However, if expectations for the Bank of England shifting to an easing stance after a prolonged period of high rates strengthen, the pound's upside may be limited. Investors should closely monitor UK economic data, Federal Reserve policy signals, and global risk events.
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