GBP/USD: Will The Weakness Around 1.2400 Continue?

(MENAFN- Investor Ideas) Investorideas, a go-to platform for big investing ideas releases market commentary from Rania Gule, Senior Market Analyst at XS - MENA

The British Pound against the US Dollar (GBP/USD) continues to hover around the 1.2400 level amidst notable weakness in the upward trend, reflecting the prevailing market uncertainty. In my opinion, the strength of the US Dollar, supported by potential protectionist policies from President Donald trump and the bank of England's gloomy outlook, places the pair in a tough spot and supports a bearish scenario in the short-to-medium term. However, ongoing changes in the economic and political landscape could lead to unexpected movements, necessitating investors to closely monitor economic indicators and political statements.

One of the key factors strengthening the US Dollar, in my view, is the threat of new tariffs on countries imposing taxes on US imports. Such actions boost demand for the dollar as a safe-haven asset, putting pressure on the British Pound. On the other hand, the Bank of England appears more cautious in its monetary policies, with Governor Andrew Bailey indicating that further rate cuts may be necessary, though the decision will be based on future economic data. This caution from the Bank of England weakens the Pound's position, especially with the slowdown in economic activity and the labour market, reinforcing market expectations of additional monetary easing.

Despite the recent US employment data coming in below expectations in terms of job additions, strong wage growth surprised the markets. Hourly wages rose faster than expected, reflecting continued inflationary pressures in the US. This data supports the Federal Reserve's position in maintaining higher interest rates for a longer period, which benefits the US Dollar against the British Pound. Jerome Powell, the Federal Reserve Chairman, has clearly stated that any adjustments to monetary policy will depend on real progress in containing inflation or signs of weakness in the labour market, neither of which have occurred so far.

In contrast, the British Pound faces additional pressures following the Bank of England's decision to cut interest rates by 25 basis points to 4.5%, with weak growth expectations. This move was not unexpected by the markets, but it raised concerns among investors when Monetary Policy Committee member Catherine Mann, known for her typically hawkish stance, supported a larger 50 basis point cut. Such a move indicates that the Bank of England sees significant risks to the UK economy, reinforcing expectations of further cuts and putting pressure on the Pound.

Additionally, I believe that the UK's GDP forecast of 0.75%, compared to the 1.5% expected in November, reflects the weakness of the economy and its ongoing challenges. This slowdown in growth could prompt investors to abandon the British Pound in favour of higher-yielding currencies, such as the US Dollar. With global energy prices continuing to rise, UK inflation is expected to see a temporary increase to 3.7% in Q3, which could further complicate the Bank of England's position and increase market uncertainty.

Given these intertwined factors, I see the trend favouring the bears in the GBP/USD pair, with the outlook remaining bearish as long as the price remains below the 50-day simple moving average. Current movements suggest a potential test of the 1.2300 level if the negative momentum persists, while any rebound towards 1.2423 may face strong resistance, with a possibility of returning to the downside if the fundamental factors supporting the US Dollar do not change.

Thus, I believe the market is still awaiting the upcoming US Consumer Price Index data, which could provide further clues about the Federal Reserve's monetary policy direction. If the data comes in higher than expected, the US Dollar may gain additional momentum, strengthening the chances of further GBP/USD declines. However, if inflation slows, the Pound may receive some support, though its impact remains limited unless the Bank of England's tone on monetary policy changes. Therefore, trading the GBP/USD pair requires caution and continuous monitoring of global market developments.

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