GBP/USD saw some buying interest during Friday's Asian trading session, pausing a two-day losing streak and pushing the pair back near the 1.3500 level. However, selling pressure around the 1.3500 handle remains notable, preventing a clear breakout. This suggests the current rebound is more of a technical correction rather than the start of a new uptrend. Meanwhile, cooling US inflation data is reshaping expectations for the Federal Reserve's policy path, putting the dollar under short-term pressure and offering temporary support to the pound.
Where to focus
The US July Producer Price Index (PPI) is a key factor behind the dollar's recent weakness. Data showed the final demand PPI was flat month-over-month in July, following a downwardly revised 0.1% decline in June, significantly missing the market's forecast of 0.2% growth. The year-over-year rate slowed to 4.7%. Core PPI rose 0.2% month-over-month, also below the expected 0.3%. From a policy perspective, the absence of further acceleration in producer prices reinforces the market view that the Fed has no urgent need to raise interest rates in the near term. The PPI data aligns with the previously released Consumer Price Index (CPI). The lack of fresh upward pressure on inflation indicators has led investors to recalibrate their expectations for the Fed's rate path. Market pricing for a September rate hike has dropped from roughly 55% a week ago to around 35%, with attention now shifting to the October and December meetings. These changing rate expectations directly impact US Treasury yields and the dollar's valuation, serving as a key driver for GBP/USD's rebound from its weekly lows. That said, the dollar's downside remains limited by safe-haven demand. Ongoing high volatility in the Middle East, along with uncertainties surrounding energy supply and key shipping routes, keeps global risk premiums elevated. Amid fears of escalating geopolitical risks, the dollar retains its appeal as a traditional safe haven, meaning that even with lower US rate expectations, the dollar is unlikely to enter a sustained, one-way decline.
Additionally, the impact of energy prices on the pound is worth watching. The UK economy grew 0.4% quarter-over-quarter in the second quarter, slowing from 0.6% in the first quarter but still exceeding some market worries about the economy's resilience. UK GDP rose 0.3% month-over-month in June, led by a strong performance in the services sector. However, temporary boosts from World Cup-related spending and warmer weather mean that the quality of this second-quarter growth needs further scrutiny. The UK economy currently faces a key contradiction: resilient growth alongside rising inflation pressures. Higher energy costs threaten to increase business operating expenses and household living costs. If energy prices stay elevated, UK inflation could risk re-accelerating in the coming months. This will force the Bank of England (BoE) into a more complex policy trade-off between cutting rates and controlling inflation, limiting the market's ability to further bet against the pound. From an interest rate differential perspective, GBP/USD's recent moves have shifted from being solely dollar-driven to being influenced by monetary policy expectations from both the US and the UK. Cooling US PPI, which reduces Fed rate hike expectations, supports the pound. However, if UK economic growth slows markedly in the third quarter, and energy costs continue to squeeze real consumption, the BoE's policy space could also be constrained, preventing the pound's rate advantage from widening further.
In terms of market sentiment, GBP/USD is currently in a clear pattern of "dollar weakness, pound rebound, but lacking breakout momentum". The 1.3500 level is not just a psychological round number but also a critical zone for the reallocation of long and short positions. If the pair repeatedly fails to break through this level, short-term traders may opt to take profits, leading to a retest of support levels below. Conversely, if upcoming US data continues to show an economic slowdown, particularly if retail sales fall short of expectations, and if Fed officials deliver more dovish signals, the dollar could weaken further, giving GBP/USD fresh upward momentum. US July retail sales and the preliminary University of Michigan consumer sentiment index, due for release later this week, will be key market variables. On the daily chart, GBP/USD found support near its weekly lows after a recent pullback and is now moving back toward 1.3500, but the rebound has yet to break through key resistance. The overall structure remains in a range-bound pattern at elevated levels. The 1.3500 level is the most important psychological resistance. A clear daily close above this level would open the door for a move toward the 1.3540-1.3580 zone. If bullish momentum strengthens, the pair could retest the 1.3600 area. On the downside, initial support lies in the 1.3450-1.3420 zone, with the 4-hour 100-period simple moving average (SMA) currently around 1.3422, serving as a key short-term support. A break below this level would indicate a disruption of the recent rebound structure, potentially leading to a decline toward the 1.3380 or even 1.3330 support levels. In terms of momentum, the price remains above the 100-period SMA, suggesting that bulls have not entirely lost control. However, repeated failures near 1.3500 indicate a lack of sufficient upward momentum. On the 4-hour chart, GBP/USD maintains a relatively positive short-term structure, trading above the 100-period SMA, so the current pullback is best viewed as a normal correction within an uptrend. Nevertheless, the pair's repeated testing of 1.3500 without a clean breakout signals notable supply pressure at this level. If the price can reclaim and hold above 1.3500, followed by a break above 1.3540, short-term bulls could gain fresh impetus, with targets gradually shifting toward 1.3580-1.3600. Conversely, if the price again fails near 1.3500 and breaks below the 100-period SMA at 1.3422, the 4-hour bullish structure would weaken significantly, increasing the probability of a deeper pullback toward 1.3380-1.3330. Technical indicators show that short-term momentum is in a recovery phase but is not yet sufficient to confirm a trend breakout. Therefore, traders should focus on the key levels of 1.3422 and 1.3500.
Why just 10 ASX 200 shares?
GBP/USD is at a critical juncture, shaped by the interplay between cooling US inflation and the resilience of the UK economy. The flat US July PPI has significantly reduced expectations for a September Fed rate hike, putting the dollar under short-term pressure and providing the pound with room to rebound. At the same time, the UK economy grew 0.4% in the second quarter, showing it has not lost significant momentum. However, energy costs and future inflation risks could still limit the BoE's policy space. Looking ahead, 1.3500 is the key pivot point for determining the pair's short-term direction. A clear break and hold above this level could drive the pair toward the 1.3540-1.3600 area. Conversely, continued failure and a break below 1.3422 could turn the rebound into a deeper correction. Overall, the dollar's short-term weakness provides upward momentum for the pound, but geopolitical risks, UK energy costs, and the sustainability of economic growth are key factors limiting further pound gains. Upcoming US retail sales, consumer confidence data, Fed speeches, and UK inflation data will determine whether the current technical rebound can transform into a sustained trend.
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