Sterling’s Technical Weakness Amid High Rates and US Dollar Strength
Even with a Bank of England policy rate holding at 4.5%, one of the highest in the G7, Sterling is struggling. The pound is trading below its 200-day moving average, a sign of technical weakness that the high interest rate cannot seem to fix. This is happening as concerns about stagflation, where growth is slow but inflation remains elevated, are becoming more prominent for the UK economy.
The main issue for the pound is not its own central bank, but the relative strength of the US economy. Last week’s US jobs report showed a solid 210,000 jobs were added, beating expectations and pushing the unemployment rate down to 3.8%. This has led markets, according to the CME FedWatch tool, to price in a lower probability of Federal Reserve rate cuts this year, strengthening the Dollar.
This leaves the Bank of England in a difficult position. UK inflation, which came in at 2.8% year-over-year in the latest reading, is still stubbornly above the 2% target, preventing the bank from cutting rates. However, recent business surveys show that economic activity is slowing under the weight of these high borrowing costs.
Looking ahead, we are watching key data releases in the coming weeks. The upcoming UK Gross Domestic Product (GDP) figures are forecast to show growth of only 0.1% for the last quarter, which would confirm the economy is barely expanding. Meanwhile, the next US inflation report will be critical in shaping the Federal Reserve’s stance and the Dollar’s direction.
For Sterling, this creates a squeeze between two forces. A strong US economy supports the Dollar, while a weak UK economy that cannot afford its high interest rates weighs on the Pound. Historically, currencies tend to weaken when their central banks are forced to keep rates high because of inflation even as the economy slows.
Bank of England’s Limited Options and Market Outlook
From a trading perspective, our bias remains moderately bearish on the pound as long as it stays below the key 1.2650 level, which marks the 200-day average. We see rallies toward that area as opportunities to position for further weakness, perhaps by buying GBP put options. On the downside, the next significant support levels are near 1.2500 and then 1.2440.
The key catalyst that could accelerate a downward move would be a weak UK GDP report combined with a firm US inflation number. This would reinforce the narrative that the pound’s interest rate advantage is not enough to protect it. For now, the market seems to agree that holding the highest yield in the G7 is buying the Pound very little support.
