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GBP/USD

GBP/USD

Trade the world’s most popular currency pair and seize the best opportunities in the forex market.

Technical and Fundamental Analysis of GBP/USD

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Reza Naderi
GBP/USD
NOVEMBER 1, 2024

The UK Autumn Budget and Its Long-Term Economic Impact

In early November, Rachel Reeves, the Labour Party’s Chancellor of the Exchequer, presented the party’s first budget in 14 years, which included increased government spending and higher taxes. Amid low economic growth and declining tax revenues, this budget aims to stimulate long-term growth. Its success depends on whether the tax hikes can effectively address structural economic issues and boost investment.

In the first half of 2024, the UK economy showed signs of recovery, with better-than-expected growth and reduced inflation. However, structural problems such as stagnant GDP, inflationary pressure in the services sector, and high public debt persist, constraining consumer spending and living standards. Challenges like the aftermath of COVID-19 and Brexit have further exacerbated the UK’s economic struggles.

The Labour Party has sought to address these challenges by increasing taxes and borrowing. While these changes won’t immediately affect consumers, businesses will face higher costs. The party plans to focus on key investments and productivity enhancements to lift the UK out of stagnation. If implemented effectively, this strategy could improve household incomes and overall economic conditions in the long term.

GBP/USD Awaits Key Economic Data

In a typically quiet week, the UK will release critical data, including October’s Consumer Price Index (CPI) on Wednesday, along with October’s retail sales and preliminary November PMI results on Friday.

In September, annual inflation in the UK fell to 1.7%, the lowest since April 2021, while core inflation dropped to 3.2%, a two-year low. For October, forecasts predict headline inflation to rise slightly to 2%. The Bank of England (BoE) is expected to maintain interest rates at 4.75% until the end of the year, with the first 0.25% rate cut projected for March.

If CPI results on Wednesday exceed expectations, investors may push back the timeline for rate cuts, potentially strengthening the pound. The pound’s rally could gain more traction if Friday’s retail sales and PMI data are also positive.

Global Market Highlights

Nvidia and the Dollar’s Strength in a Quiet Week

This week, the US earnings season enters its final phase, with Nvidia taking center stage. Investors will closely watch Nvidia’s earnings and CEO comments for signs of sustained growth. With Nvidia’s stock near its all-time high, expectations remain high, though the company has a history of exceeding them. Wall Street is keen to see how Nvidia’s performance stirs market activity this week.

After last week’s stronger-than-expected US retail sales, markets will also monitor Walmart’s earnings to gauge alignment with broader retail trends. Better-than-expected earnings reports could fuel Wall Street’s rally and further strengthen the US dollar.

Recent US economic data continues to reflect strength, with notable growth in the services sector as the PMI index rose from 54.9 to 56.0. The labor market remains robust, and consumer sentiment is upbeat. The US Economic Surprise Index is now at its highest in seven months.

Combined with persistent inflation above target, these conditions prompted Federal Reserve Chair Jerome Powell to adopt a less dovish tone last week, casting doubt on a December rate cut. Market expectations for a December rate cut have dropped from 80% last week to 60%. Any improvement in Friday’s preliminary PMI figures could reinforce Powell’s cautious stance, boosting the dollar and putting pressure on gold prices.

 

Buy Plan:

The 1.25957–1.25774 range serves as a strong support for the GBP/USD downtrend. Given the fading volatility sentiment tied to the U.S. elections, this support could hold stronger than expected. As long as GBP/USD stays above 1.25774, any dip toward this range presents a buying opportunity, targeting levels like 1.28369 and 1.29056, with a less likely target at 1.30406.

Sell Plan:

If GBP/USD stabilizes below 1.25774, it opens the door for a bearish move targeting 1.24453 and 1.22940.

Analysis Summary:

The UK’s Autumn Budget, aimed at stimulating long-term economic growth, involves increased government spending and higher taxes. Its success hinges on effectively addressing the structural issues in the British economy. While the first half of 2024 showed signs of recovery, challenges like persistent service sector inflation, high debt, and Brexit-related impacts continue to hinder growth. Businesses may face higher costs due to increased employer national insurance rates, while consumers are unlikely to feel immediate effects.

Upcoming economic data such as inflation (CPI) and PMI will be crucial in shaping monetary policy and supporting the pound. Meanwhile, strong U.S. corporate earnings and economic data could extend the dollar rally, adding pressure on GBP/USD.

Technical analysis shows that the 1.25957–1.25774 range remains key support. As long as the price stays above this level, buying opportunities toward 1.28369 and 1.29056 exist. However, breaking below 1.25774 could pave the way for a decline toward 1.24453 and 1.22940.

Introduction to the
GBP/USD Currency Pair

The GBP/USD currency pair represents the value of the British pound against the US dollar. For example, if GBP/USD is trading at 1.29, it means you need 1.29 US dollars to purchase one British pound.

This pair is also known as the "Cable," a term dating back to the 19th century. At that time, financial transactions between the UK and the US were transmitted via the "transatlantic cable," a telegraph line running under the Atlantic Ocean that connected the two countries. Hence, GBP/USD earned its nickname, "Cable."

The Importance of GBP/USD in Global Trading

GBP/USD is the oldest forex currency pair and remains one of the most liquid and heavily traded pairs in the market. These qualities make it a key player in global financial transactions.

This significance stems from the pivotal role of the currencies involved. Before World War I, the British pound accounted for 60% of global reserves before being overtaken by the US dollar. Today, the US dollar is the world’s primary reserve currency and the most traded, while the pound ranks third, following the euro.

Additionally, the United States and the United Kingdom are two of the largest economies and major trading partners, making GBP/USD a symbol of their economic strength and interdependence.

Economic Factors
Influencing the
GBP/USD

The GBP/USD exchange rate is influenced by factors ranging from the economic size and trade balance between the two countries to monetary policies set by their central banks and geopolitical events.

Both the UK and the U.S. are among the largest global economies. Changes in the size or growth of one economy relative to the other impact this currency pair. For instance, if the UK economy grows faster than the U.S., the GBP/USD rate will rise. Conversely, trade balance shifts also affect the rate; a trade surplus in favor of the UK will strengthen the pound against the dollar.

Geopolitical events and global economic risks, such as Brexit, can also significantly influence GBP/USD. For example, Brexit uncertainty caused a sharp 12% drop in the pair’s value. Other factors like inflation rate differences, economic data releases, and speeches by the Federal Reserve (Fed) and the Bank of England (BOE) also drive fluctuations in the pair.

The Role
of the Bank of England and the Federal Reserve
in GBP/USD

Monetary policies from the BOE and the Fed are among the most significant drivers of the GBP/USD rate. These central banks monitor economic indicators such as inflation, unemployment, and GDP to decide on interest rates and implement expansionary or contractionary policies. These decisions directly impact their respective currencies and, by extension, GBP/USD.
Typically, contractionary policies strengthen a currency, while expansionary policies weaken it. For instance, if U.S. inflation rises and the Fed increases interest rates to control it, the dollar will strengthen against other currencies, causing GBP/USD to decline. The impact is more pronounced when the BOE and Fed adopt opposing policies, one strengthening its currency while the other weakens.

GBP/USD

Trading Strategies for GBP/USD

Some popular strategies for trading GBP/USD include:

GBP/USD
Breakout Strategy: This approach involves trading when a key support or resistance level is broken, anticipating strong upward or downward trends. This strategy is particularly effective during the London session when GBP/USD often breaks key levels due to high trading volume.
GBP/USD
Scalping Strategy: GBP/USD’s intraday volatility and high liquidity make it a favorite for scalpers, who aim to profit from small price movements within the London trading session.
GBP/USD
Fibonacci Strategy: The Fibonacci tool is highly effective in identifying potential reversal points. Combining it with other technical indicators can enhance its accuracy, making it a reliable tool for GBP/USD traders.

Comparing
of GBP/USD

with Other Major Currency Pairs

High volatility, liquidity, and trading volume are common traits of popular forex pairs such as GBP/USD, EUR/USD, and USD/JPY.

  • Compared to EUR/USD, GBP/USD is more volatile and reacts more strongly to economic news, providing better opportunities for traders who thrive on price swings. EUR/USD, on the other hand, has tighter spreads and greater stability, appealing to those seeking less volatility.
  • Compared to USD/JPY, GBP/USD experiences significantly higher volatility due to the contrasting monetary policies of the BOE and the Bank of Japan (BOJ). The BOJ’s long-standing negative interest rates and easing policies result in relatively lower USD/JPY volatility, while GBP/USD’s price swings attract risk-tolerant traders.

Historical Volatility of the GBP/USD Pair

The British pound is the oldest currency still in use. In the 19th century, the pound was worth five times the U.S. dollar. Following the American War of Independence, GBP/USD strengthened to a ratio of 10:1. However, through the 20th century, world wars and economic turmoil caused the pound to lose value.

  • After World War II, due to Britain’s heavy debt to the U.S., GBP/USD was fixed at 4.03 until 1971 when the Bretton Woods system introduced floating exchange rates, leading to further declines.
  • During the 1970s oil crisis, UK inflation soared to 25%, prompting the government to raise interest rates and drive GBP/USD to 2.40. However, in 1981, recession and contractionary policies led to a historic drop to 1.03.
  • Notable events like Black Wednesday in 1992 (a 25% crash), the 2007-2008 financial crisis, Brexit, and the COVID-19 pandemic triggered further significant drops.

In recent years, post-pandemic inflationary pressures and government interventions have generally supported GBP/USD recovery, particularly with rising interest rates.

GBP/USD

Tips for
Successful
GBP/USD
Trading

Stay informed about how news releases impact GBP/USD volatility.

  • Monitor the overall economic conditions and relations between the UK and the U.S., as well as policy updates from the BOE and Fed.
  • Use technical analysis and indicators, and closely watch the U.S. Dollar Index, which has a negative correlation with GBP/USD.
  • Focus on high-liquidity sessions, especially the London session, for optimal trading opportunities.
  • Always have a trading plan ( How to create a trading plan ) and set clear take-profit and stop-loss levels before entering any trade.
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