The GBP/USD exchange rate is facing increasing pressure as market participants favor the US dollar over the British pound. The US dollar index continues to be supported by Friday’s strong jobs report, while the Bank of England’s (BoE) Governor Bailey’s recent statement on the expectation of declining inflation in the UK has given markets the belief that the central bank may be closer to a pause in rate hikes compared to the Federal Reserve.
The UK housing market did receive some positive news as prices stabilize after a 4-month decline, according to data from Halifax. However, house price growth YoY slowed to its weakest increase in three years at 1.9%. With rising rates and mortgage approvals at their lowest since the 2008-09 financial crisis, demand for housing is unlikely to recover in the near future.
Speeches from both the BoE’s Jon Cunliffe and Fed Chair Jerome Powell today will be closely watched by the markets. Powell is expected to adopt a hawkish tone, which would further support the already strong US dollar.
From a technical perspective, GBP/USD is on course for its fourth consecutive day of losses. The pair has declined over 450 pips since forming a double top pattern on January 23 and is approaching the 200-day moving average at around 1.1950, which could provide some support. However, with the Relative Strength Index (RSI) in overbought territory, a retracement may occur before the pair continues lower to test the 100-day moving average at 1.1800.
BoE vs Fed: Inflation Expectations Driving GBP/USD
Inflation expectations are the main driver behind the current GBP/USD exchange rate. While the Federal Reserve is expected to continue with rate hikes, the Bank of England’s (BoE) Governor Bailey’s recent statement on the expectation of declining inflation in the UK has given markets the belief that the central bank may be closer to a pause in rate hikes compared to the Fed.
The US dollar received a boost from Friday’s strong jobs report, with market participants pricing in a higher peak rate for the Fed Funds in 2023. On the other hand, the UK housing market has stabilized after a 4-month decline, with house price growth YoY slowing to 1.9%, its weakest increase in three years. With rising rates and mortgage approvals at their lowest since the 2008-09 financial crisis, demand for housing is unlikely to recover in the near future.
Conclusion
In conclusion, inflation expectations are driving the GBP/USD exchange rate, with the Federal Reserve expected to continue with rate hikes while the Bank of England may be closer to a pause. The strong US jobs report and expected hawkish tone from Fed Chair Powell are supporting the US dollar, while the UK housing market and declining inflation expectations are weighing on the British pound. The technicals show the pair approaching a potential support level, but a retracement may occur before continuing lower.
