- GBP/USD has rallied by 2.1% from Monday, 3 February swing low.
- The 2-year yield premium shrinkage between UK sovereign fixed income over the US Treasury Note may trigger a bearish reversal on the GBP/USD.
- Watch the key medium-term resistance of 1.2610 on the GBP/USD.
Since its swing low of 1.2249 printed on Monday, 3 February, the GBP/USD has rallied for three consecutive sessions with a gain of 2.1% and hit an intraday high of 1.2550 on Wednesday, 5 February.
UK-US Trade Deal Optimism and BoE’s Gradual Approach in Cutting Rates Support a Recent Firmer GBP
Fig 1: 5-day rolling performance of the US dollar against major currencies as of 6 Feb 2025 (Source: TradingView)
The recent push-up in the GBP/USD has been attributed to two key factors. Firstly, on the ongoing trade tensions between the US and its major trading partners, US President Trump has remarked that a potential trade deal could be worked out between the US and the UK which has lowered the odds of US trade tariffs being imposed on UK goods.
Secondly, it is now widely expected that the Bank of England (BoE) will likely enact its third interest cut of 25 basis points since August last year on Thursday, 6 February to bring the policy bank rate down further to 4.5%.
Interestingly, the market participants seem to be pricing in some form of “hawkish cut” in today’s BoE monetary policy decision as its new economic forecasts for the UK economy may see a downgrade on growth prospects for 2025 while inflation pressures face the risk of an upside revival due to UK Chancellor Reeves’s recent expansionary budget.
Therefore, these potential lowered growth and higher inflation forecasts are likely to reinforce stagflation fears in the UK economy, in turn raising the likelihood of BoE adopting a “gradual approach” stance towards loosening monetary policy in the near term.
GBP/USD at Risk of Bearish Reversal Below 1.2610
Fig 2: GBP/USD medium-term trend as of 6 Feb 2025 (Source: TradingView)
On the contrary from a technical analysis standpoint, the recent multi-week rebound seen in the GBP/USD from its 13 January swing low of 1.2100 is likely to be a corrective move sequence within its medium-term downtrend phase that remains intact.
Intermarket technical analysis using the yield spread between the 2-year UK sovereign bond over the 2-year US Treasury Note has flashed a bearish momentum condition which suggests that there are higher opportunity costs of holding onto medium-term UK fixed income instruments versus US fixed income due to a potential reduction in UK yield premium (see Fig 2).
These observations suggest the British pound may continue to see further downside pressure against the US dollar in the medium term.
Watch the 1.2610 key medium-term pivotal resistance, and a breakdown below 1.2310 support suggests a potential continuation of its impulsive down move sequence to expose the next medium-term supports of 1.2050 and 1.1840 over a medium-term horizon (multi-week).
However, a clearance above 1.2610 invalidates the bearish scenario for a squeeze up towards the long-term pivotal resistance zone of 1.2810/2910 (also the 200-day moving average & 61.8% Fibonacci retracement of the medium downtrend phase from 26 September 2024 high to 13 January 2025 low).