The British pound edged higher against the US dollar during Friday's Asian trading session, holding around the 1.3450 level. As positive signals emerged from extended ceasefire talks between the United States and Iran, market risk aversion softened, reducing demand for the US dollar and supporting a second consecutive day of gains for GBP/USD.
The US and Iran have preliminarily agreed to a 60-day extension of the ceasefire, which, if finalized, is expected to restore stability to shipping in the Strait of Hormuz. Under the arrangement, Iran will clear mines from the shipping lanes within 30 days, thereby reducing risks to global energy transportation.
However, markets remain cautious regarding the agreement. US President Trump has not yet formally approved the terms, and US Vice President Vance noted that while a final deal is not yet complete, negotiations are largely concluded. Meanwhile, the US reiterated that it will maintain a firm stance on Iran's nuclear program if necessary.
Despite this, the prevailing market view is that easing tensions in the Middle East helps alleviate global concerns over energy supply disruptions. As international oil prices have continued to retreat recently, global inflationary pressures have shown signs of cooling. WTI crude has fallen nearly 15% this month, with risk premiums previously driven by Middle East tensions rapidly unwinding.
The US dollar faced downward pressure even before the geopolitical news, following the release of US PCE inflation data that was weaker than the market's most pessimistic expectations. The data showed US core PCE rising 0.2% month-on-month in April. While annual inflation remains above the Federal Reserve's target, fears that energy shocks could further push up core inflation proved unfounded, as the actual figures did not significantly exceed forecasts.
Analysts suggest the moderate core PCE reading has eased market concerns about the Fed maintaining "higher-for-longer" interest rates. Some investors are beginning to reposition, anticipating that the Fed's future policy stance may not be as aggressive as previously feared, which provides some support for risk assets.
Joel Kruger, a market strategist at LMAX Group, stated that slowing US core inflation and a gradual cooling of economic growth imply the Fed may reduce the intensity of its "higher-for-longer" policy, a shift that typically benefits risk-sensitive currencies.
Against the backdrop of a weaker dollar, the pound has found some support. However, recent signs of cooling in the UK's domestic economic fundamentals have limited further upside for sterling. Recent softness in the UK labor market, slowing inflation, and signs of decelerating economic activity have significantly reduced market expectations for further interest rate hikes by the Bank of England.
Concurrently, falling international oil prices have further alleviated imported inflationary pressures for the UK. As the UK is highly dependent on energy imports, lower oil prices typically help ease inflation risks but also reduce the necessity for the Bank of England to maintain high interest rates.
Markets are gradually adjusting their expectations for the Bank of England's policy path. Some investors believe that if UK economic data continues to weaken, the central bank may signal interest rate cuts earlier than previously anticipated. The cooling of UK rate expectations is a key factor currently capping the pound's appreciation.
From a global forex market perspective, the core of current exchange rate volatility revolves around the interplay between "high US interest rates" and "improving global risk sentiment." While the dollar has experienced a short-term pullback due to the PCE data and easing Middle East tensions, the overall resilience of the US economy and persistently high US Treasury yields suggest that the dollar's medium-to-long-term support has not completely vanished.
From a technical standpoint, the daily chart for GBP/USD shows a consolidating yet slightly bullish structure. After reclaiming the 1.3400 level, bullish sentiment has recovered somewhat. The daily MACD indicator is gradually improving upward, and the RSI has rebounded to around 55, indicating improved short-term momentum. A sustained break above the 1.3480 region could pave the way for tests of resistance at 1.3520 and 1.3550. On the 4-hour chart, the short-term moving average system is gradually shifting to a bullish alignment, suggesting potential for further gains. However, strong psychological resistance persists near 1.3500. If the dollar regains strength, the pair could retreat to test support levels at 1.3400 and 1.3360.
Overall, the recent movement in GBP/USD has been primarily driven by a temporary dollar correction. However, a cooling UK economy and weakening expectations for Bank of England policy are limiting the pound's medium-to-long-term upside potential. Going forward, markets will focus closely on US economic data, the Federal Reserve's policy path, and developments in UK inflation and employment figures.
The recent rebound in GBP/USD has been largely fueled by short-term dollar weakness, with progress in US-Iran ceasefire talks and weaker-than-feared US PCE data easing market risk aversion and high inflation concerns. Nonetheless, the UK's own economic fundamentals are also cooling, and expectations for further policy tightening by the Bank of England have diminished significantly, constraining sterling's overall appreciation potential. The market's core narrative is gradually shifting from "geopolitical risk trading" towards "trading on major central bank policy paths." The future direction of the pound will depend on whether the UK economy continues to slow, the Federal Reserve maintains higher rates for longer, and whether global risk sentiment can sustain its improvement.
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