- BoE Governor Bailey’s speech at the Jackson Hole Symposium reiterated BoE’s cautionary dovish monetary policy stance.
- Short-term interest rate markets are likely to price in a shallower and slower interest rate cut cycle in the UK.
- The potential further widening of the 2-year yield premium of UK gilts over US Treasury notes may support a further upmove in the GBP/USD.
- Watch the 1.3000 key medium-term support on the GBP/USD to maintain its ongoing medium-term uptrend phase.
The British pound sterling (GBP) has been the top performer among the major currencies, strengthening by 3.9% year-to-date as of 27 August against the US dollar.
The current strength of the GBP has been supported by a cautious dovish monetary policy stance adopted by the Bank of England (BoE) after its first 25 basis points (bps) cut on its policy Bank Rate in its recent August meeting to bring it down to 5% from a 16-year high of 5.25%, that had been left unchanged for a year.
BoE May Adopt a Shallower and Slower Interest Rate Cut Cycle
BoE’s cautionary stance was reiterated last Friday, 23 August Jackson Hole Symposium where BoE Governor Bailey stated that further interest rate cuts in the UK should not be rushed because it was still too soon to be sure inflation was beaten even though longer-term inflationary pressures were easing,
Hence, going forward, it is likely to draw a wedge between US and UK interest rates where short-term interest rate markets are likely to price a shallower and slower interest rate cut cycle in the UK.
Bullish Breakout After One Year of Range Consolidation
Fig 1: GBP/USD medium-term trend as of 27 Aug 2024 (Source: TradingView)
The price actions of the GBP/USD staged a bullish breakout last Tuesday, 20 August after it consolidated for almost one year of “Symmetrical Triangle” range configuration since 13 July 2023.
In addition, it has also cleared above its former long-term secular descending trendline resistance that capped prior rallies since July 2014.
Even though the daily RSI momentum indicator is now hovering at an overbought condition level of 74, there is no bearish divergence signal being flashed out at this juncture which suggests lower odds of a bearish reversal scenario for the GBP/USD.
Intermarket analysis also supports the potential start of a medium-term uptrend phase for the GBP/USD. The 2-year sovereign yield spread between UK gilts and US Treasury notes has staged a bullish breakout above its former major descending trendline resistance from 12 July 2023.
This observation suggests that the 2-year yield premium of UK gilts over US Treasury notes may widen further from 0.18% printed at this time of the writing which in turn may make UK fixed-income instruments more attractive over US.
Watch the 1.3000 key medium-term pivotal support on the GBP/USD with the next medium-term resistances coming in at 1.3400/3505 and 1.3750 next (see Fig 1).
On the other hand, a breakdown below 1.3000 invalidates the bullish tone to see another round of choppy corrective movements to expose the next medium-term supports at 1.2860 and 1.2635 (also close to the 200-day moving average).