The pound’s earlier drop, caused by rising UK long-term yields, changed after a disappointing US Non-Farm Payroll report. This led to a decline in the US dollar as expectations grew for the Federal Reserve to take a softer approach, with projections of rate cuts up to 70 basis points by year-end. If the US Consumer Price Index (CPI) remains weak as the Federal Open Market Committee (FOMC) meeting approaches, it may further weaken the dollar. Despite these changes, the US dollar stays within a specific range, influenced by potentially overextended bearish positions. If the economy improves after Fed rate cuts, future cuts could be reassessed, which might support the dollar. In contrast, the Bank of England has a hawkish stance backed by solid data, including rising UK CPI and Flash PMIs, despite a recent decline due to the UK 30-year yield hitting a cycle high.

Technical Analysis Of GBP/USD

For GBP/USD, traders watch key resistance and support levels closely, reacting to potential breaks or rebounds. The daily, 4-hour, and 1-hour charts suggest that buyers may aim for higher levels if current momentum continues or if they break through key resistance. Upcoming economic reports, like US PPI and CPI, UK GDP, and consumer sentiment, will influence the market. The US dollar weakened last Friday after the Non-Farm Payrolls report revealed only 110,000 job gains, missing expectations. This weak data has led to predictions of three Federal Reserve rate cuts by the year’s end. As a result, the derivative markets now show over a 90% chance of a cut at the September 17th FOMC meeting. All eyes are now on the US CPI report scheduled for this Thursday, with economists expecting a 0.2% month-over-month increase in the core reading. A lower figure could prompt more dollar weakness and signal options traders to buy GBP/USD calls. Conversely, a stronger-than-expected result could quickly shift the market’s view on the pace of Fed cuts. For the pound, the situation is quite different. The Bank of England is worried about persistent inflation, as last month’s UK CPI printed at 3.1%. This keeps pressure on the central bank to hold off on further cuts. This difference in policy approaches is a key reason for the continued strength in the GBP/USD pair.

Market Positioning Strategies

Currently, the pair is testing the important 1.3590 resistance level after bouncing back from the 1.3368 support area. Traders may consider buying short-dated call options with a strike price above 1.3600 in anticipation of a breakout from a weak US CPI report. Alternatively, put options below the current upward trendline could offer protection if US data turns out strong. This situation reminds us of market behavior in spring 2024, when weak US data led to a significant dollar decline. While we acknowledge that bearish dollar positions may be getting crowded, it seems that the easiest path for the dollar is down. A strong upside surprise in the data would be needed to change this outlook. Create your live VT Markets account and start trading now.

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