The British pound continued its ascent against the US dollar during Tuesday's Asian trading session, marking its ninth consecutive day of gains and trading near 1.3390. The primary driver of this trend is sustained weakness in the US dollar, as market participants scale back expectations for further interest rate hikes from the Federal Reserve. This reassessment has intensified following recent cooling in US employment data.
The latest employment figures for April, May, and June have fallen short of prior market forecasts, indicating a gradual cooling in the labor market. This development has eroded investor confidence in the Fed's ability to maintain high interest rates or implement further hikes, applying selling pressure on the dollar and fueling the GBP/USD rebound.
Additionally, a recent pullback in international crude oil prices has altered the market's assessment of inflation risks. With OPEC+ increasing production and expectations of easing US-Iran relations, energy prices face downward pressure, providing some relief to global inflationary pressures. This reduces the necessity for the Fed to pursue more aggressive tightening policies, further undermining the dollar's upward momentum.
However, the dollar is not without support. Federal Reserve Governor Christopher Waller recently delivered hawkish remarks, emphasizing the need for flexibility in monetary policy communication while reiterating the importance of the 2% inflation target. He noted that forward guidance is a crucial tool, but excessive rigidity could limit policy adjustment space.
Following Waller's comments, related market sentiment indicators have shifted further towards a hawkish stance. Analysis suggests his emphasis on the credibility of the inflation target and his opposition to maintaining low rates to aid fiscal financing underscore a continued focus on controlling inflation, which could provide some underlying support for the dollar.
On the US economic data front, service sector activity, while showing signs of slowing, remains in expansion territory. The US ISM Services PMI for June came in at 54.0, meeting market expectations. Within the report, the Prices Index declined from 71.3 to 67.7, indicating easing cost pressures, while the Employment Index rose from 47.9 to 51.2, moving back into expansion and reflecting an improvement in US service sector employment conditions.
While the dollar faces pressure, the pound itself is under strain from shifting policy expectations. The market has significantly lowered its expectations for further monetary tightening by the Bank of England. Investors now see only about a 70% probability of one rate hike from the BoE this year, compared to expectations for two hikes just a few weeks ago.
Bank of England Governor Andrew Bailey recently stated that UK inflation is still expected to fall back to the 2% target, but the process may be slower than previously anticipated. He explicitly ruled out the possibility of near-term rate cuts. This indicates that while the BoE maintains a cautious stance, its policy space is constrained by both economic growth and persistent inflation pressures.
The Bank of England's policy meeting on June 18th resulted in a decision to hold the benchmark interest rate steady at 3.75%, with a 7-2 vote in favor of no change. However, compared to April, the number of committee members advocating for a hike increased, with two members arguing for an immediate increase to 4.00%, highlighting ongoing internal divisions regarding inflation risks.
Current UK inflation stands at approximately 2.8%, a significant decline from its peak. However, internal BoE projections suggest inflation could rebound above 3% in the autumn due to delayed pass-through effects from earlier energy costs. Consequently, some major financial institutions forecast that the next UK rate hike may not occur until late 2026.
Overall, the recent GBP/USD rally is primarily driven by dollar weakness rather than a marked improvement in UK economic fundamentals. In the near term, if expectations for a more dovish Fed policy shift persist, the pound may find continued support. However, a slowing BoE tightening cycle could limit the pound's potential for further significant gains.
Technical Analysis Perspective
From a daily chart perspective, GBP/USD's nine-day winning streak has established a clear short-term bullish trend, with the price consistently trading above its short-term moving averages and market momentum remaining robust. The pair is now approaching the key psychological barrier at 1.3400. A decisive break above this level could see the next targets at 1.3450 and potentially 1.3500. Initial support is seen around the 1.3300 area; a break below this level could trigger short-term profit-taking, testing support near 1.3250. With technical indicators entering overbought territory after the prolonged rally, the market should be wary of near-term consolidation risks.
On the 4-hour chart, GBP/USD maintains a structure of oscillating higher, with the price gradually ascending along its moving average system, indicating short-term buyers still hold the advantage. However, momentum indicators like the RSI are already in elevated territory, suggesting the pace of ascent is rapid and a corrective pullback may be due. A sustained break and hold above 1.3400 would further confirm the continuation of the uptrend. Failure to break through could see the pair retrace to test support in the 1.3350 to 1.3300 zone. The immediate short-term direction will largely depend on the dollar's trajectory and market adjustments to policy expectations from both the Federal Reserve and the Bank of England.
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