GBP/USD rebounded from a recent low of 1.3415 after a 1.2% drop, caused by disappointing UK inflation data for May. The recovery was also supported by a weaker US dollar, as traders awaited rate decisions from the Federal Reserve and the Bank of England. Both central banks are expected to keep interest rates steady, while focusing on future forecasts for the year. The GBP/USD structure weakened as it fell below critical support levels, needing to close under 1.3444 to continue a downward trend.

Risk Averse Market Climate

In a risk-averse market, the US Dollar gained strength, affecting GBP/USD as safe-haven flows increased after Donald Trump hinted at US involvement in the Iran-Israel conflict. The GBP/USD chart shows a bullish trend and is now in the last phase of an upward movement. Market players expect the Federal Reserve to maintain its current policies following a previous rate cut, while awaiting signals for future adjustments. Meanwhile, Bitcoin, Ethereum, and XRP remain stable above important support levels, managing recent geopolitical tensions and economic changes well. The rebound from the 1.3415 low in GBP/USD was not just technical. It followed the UK’s inflation figures missing expectations, indicating weaker price growth for May. This disappointed consumers led traders to rethink the Bank of England’s roadmap, putting pressure on the pound at first. However, the US dollar also softened, reflecting a change in sentiment before key central bank decisions. We’re starting to see a pattern. When both currencies face uncertainty in policy direction, short-term movements often come from minor data shifts or geopolitical news. Traders react cautiously, adjusting their positions rather than acting on strong conviction. This recent bounce likely shows that; some traders covered short positions instead of creating new bullish positions. This leaves GBP/USD in a weak position, where resistance is significant, and any further decline could expose important technical levels again. In the short term, neither side is likely to change interest rate expectations, with the Fed expected to keep rates steady and focus more on forward guidance. While fundamental changes are minimal, investors will be closely watching for any changes in tone from Powell and his team. The market is more interested in signals rather than immediate action. Even a subtle mention of slower growth or ongoing inflation could swiftly impact dollar-linked pairs.

Speculation Regarding Policy Normalisation

A similar situation is occurring with Bailey. Speculation about policy normalization advancing this year has been influenced by May’s inflation report. Traders are leaning away from rate hike expectations, adopting a more cautious approach. The lack of a clear commitment to either raising rates or easing could trigger short-term volatility, particularly around employment and retail data releases. Earlier trading saw safe-haven flows boosting the dollar after Trump hinted at increased US involvement in rising Middle East tensions. However, these moves didn’t last long, indicating that the market might not fully account for a prolonged conflict yet. Such narratives can lead to quick, significant reactions, so traders should remain aware of overnight risk and weekend gaps. The overall trend, as per the chart structure, suggests that this pair may be finishing the last stages of a bullish move. This is a point for caution. Rushing into trades during a rally can lead to trapping long-side momentum at unsustainable levels. If there’s a failure to close convincingly above previous resistance lines or if breakout attempts falter quickly, expect a downward rotation. The important 1.3444 level, which has already been tested, remains crucial—closing convincingly below it might trigger further selling. Volatility shifts aren’t limited to fiat markets. Those following digital assets, especially Bitcoin and Ethereum, have observed that these coins have held up relatively well despite ongoing global tensions and broader economic concerns. Their trading above known support levels shows a hint of confidence. However, caution remains, and leveraged bets are still thin. This hesitance in riskier areas of the market underscores a theme of cautious positioning. In the coming weeks, momentum-driven strategies will require careful monitoring, especially during important releases and central bank communications. When narratives around inflation, growth, or geopolitical risks change, they can do so quickly, allowing little time for manual adjustments. While the general sentiment appears to support the pound within current ranges, underlying uncertainty still exists. Focusing on managing downside risk and safeguarding gains will be more critical than chasing uncertain profits for the moment. Create your live VT Markets account and start trading now.

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