The Pound Sterling (GBP) has surged to a fresh weekly high in the early European session on Friday, fueled by expectations that the Bank of England (BoE) may follow the Federal Reserve (Fed) and the European Central Bank (ECB) in reducing interest rates. The improved risk appetite in the market has also contributed to the Pound’s gains.
Recent statements from key central bank figures, including Federal Reserve Chair Jerome Powell, ECB President Christine Lagarde, and BoE Governor Andrew Bailey, suggest a growing consensus on potential rate cuts. While the Fed has already implemented three rate cuts this year, Lagarde anticipates the ECB to begin the rate-reduction process later in the summer.
Governor Bailey, like Powell, refrained from explicitly speculating on rate cuts and cautioned about the possibility of price pressures increasing in the second half of the year. The BoE appears to be prioritizing the management of high price pressures over addressing concerns of a deepening economic recession, especially after the UK experienced a 0.1% decline in economic growth in the third quarter of 2023.
The GBP/USD pair is maintaining its gains, but faces potential volatility ahead of the US Bureau of Labor Statistics (BLS) labor report, specifically the Nonfarm Payrolls (NFP) release for January. Positive labor market data could diminish expectations of a Fed rate cut in May.
The Pound Sterling’s optimistic outlook is further supported by the cheerful market sentiment and the BoE’s cautious stance on interest rate cuts in its recent monetary policy announcement. Governor Bailey emphasized the need for evidence that inflation will sustainably return to the 2% target before considering further rate adjustments.
While some BoE policymakers advocated for a rate hike, higher interest rates are anticipated to exacerbate the UK’s labor market conditions, with the Unemployment Rate expected to rise to 5% by the end of 2026. The longer restrictive monetary policy could also impact business optimism and discourage fresh investment plans.
In contrast, the US Dollar faces significant selling pressure amid hopes of a Fed rate cut in May, despite Powell’s reluctance to speculate on such measures. The market is closely watching the US NFP report for January, with estimates suggesting lower hiring numbers compared to December.
Technical analysis indicates that Pound Sterling is poised to extend its rally towards the resistance level of 1.2800, supported by multiple tailwinds. The GBP/USD pair is attempting a breakout of the Descending Triangle chart pattern, with the 14-period Relative Strength Index (RSI) approaching a bullish turn if it sustains above the 60.00 hurdle.
