The GBP/USD exchange rate retreated for six consecutive weeks, reaching its lowest level since August 12. It has retreated by almost 4% from its highest level this year as traders focus on the US election and the upcoming Federal Reserve and Bank of England (BoE) interest rate decisions.
US bond yields jump after Trump’s victory
The GBP to USD exchange rate continued falling after US government bond yields surged to the highest level since July this year after the US election. The ten-year jumped to 4.47%, while the 5-year soared to 4.3%.
This performance was a continuation of what has been happening since September 11, when bond yields fell.
Bond yields rose after Donald Trump won the election on Wednesday. In his campaign, Trump focused on several issues like tax cuts, deregulation, and tariffs. Some of these measures, especially tariffs, will be highly inflationary, which could push the Fed to embrace a more hawkish tone in the future.
Some Trump’s policies could also lead to more geopolitical issues, which will be a positive thing for the US dollar.
Looking ahead, the next important catalyst for the GBP/USD pair will be the Federal Reserve interest rate decision, which will happen on Thursday.
Economists believe that the Fed will decide to cut interest rates by 0.25% in this meeting as it continues to engineer a soft landing for the American economy. The bank has already slashed interest rates by 0.50% in a previous meeting.
Odds of another cut rose after the US published weak jobs numbers on Friday. According to the Bureau of Labor Statistics (BLS), the economy created just 12,000 jobs in October, while the unemployment rate remained above 4.0%.
Bank of England’s decision ahead
The next important catalyst for the GBP/USD pair will be the Bank of England decision, which comes a week after Rachel Reeves unveiled her budget. The budget will have tax increases and more spending.
Economists expect that the BoE will also maintain a dovish tone in the coming meeting by cutting interest rates by 0.25%.
It hopes that these cuts will lead to a stronger economic recovery in the coming months. Besides, recent data has showed that the economy was doing much better than expected.
For example, the economy expanded in August after contracting in the previous two consecutive months. Also, the manufacturing and services PMIs have remained above 50 in the past few months.
At the same time, UK’s inflation has continued falling and moved below the 2% target zone. The closely-watched services inflation has also continued moving downwards.
Therefore, a BoE cut will likely not have a major implication in the GBP/USD pair since it has already been priced in by market participants.
Analysts at ING expect the bank to cut, with seven members supporting it and two opposing. If this happens, they see the GBP/USD pair falling by just 50 pips. They wrote:
“Given that interest rate markets since mid-September have re-priced the BoE landing point some 75bp higher, we think upside risks to sterling from BoE communication are quite limited. Instead, a BoE staying focused on the easing cycle this week could see sterling correct lower.”
GBP/USD technical analysis
GBP/USD chart by TradingView
The four-hour chart shows that the GBP/USD exchange rate has been under intense pressure in the past few weeks. It has dropped from a high of 1.3435 in September to the current 1.2925.
The pair has constantly remained below the 50-period and 25-period moving averages, implying that bears are in control.
It has also moved below the 61.8% Fibonacci Retracement point. Also, it has formed a small double-bottom pattern at 1.2843.
Therefore, there is a likelihood that it will stage a comeback as the Trump election fears ease. If this happens, it could rise to the key resistance level at 1.3050, its highest point on November 6.
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