The GBP/USD exchange rate has formed a giant cup and handle pattern, pointing to a strong British pound surge in the near term. The pair traded at 1.3355 on Thursday as traders waited for the upcoming Bank of England decision.
Bank of England interest rate decision
The GBP/USD exchange rate has jumped by over 10% from its January lows, a trend that may continue this year.
A key catalyst will come from the United Kingdom, where the Bank of England will make its interest rate decision.
Economists expect the bank to unanimously cut interest rates by 0.25%, bringing them to 4.25%. It will do that to boost an economy that has softened in the past few months, a trend that may continue because of Donald Trump’s tariffs.
The bond market is already anticipating a cut next week as the ten-year yield dropped to 4.45%, down from 4.94% in January. Similarly, the five-year Gilt has dropped from 4.65% to 3.92%.
Recent economic numbers from the UK provide more information on why the bank will cut interest rates. For example, the IMF has slashed the UK GDP estimate for the year, and now expects it to grow by 1.1% this year, down from the previous guidance of 1.6%. It also expects that the economy will grow by 0.1% next year.
On the positive side for the UK, its growth will be better than that of the other G7 countries, excluding Canada and the United States.
UK inflation has also dropped slightly in the past few months, with the headline consumer price index falling to 2.6% in March from 2.8% a month earlier. In a note, analysts at ING wrote that they expect the BoE to cut this time and then hold them unchanged in the next meeting. They wrote:
“Markets see the chance for a consecutive cut in June at around 50%, but here we disagree. Instead, our economists still sees the BoE sticking to a gradual easing of one cut per quarter.”
Hawkish Federal Reserve decision
The GBP/USD exchange rate also reacts to the latest Federal Reserve interest rate decision. As was widely expected, the bank decided to leave rates unchanged as officials embraced a wait-and-see approach.
They want to see whether Donald Trump’s tariffs will lead to a higher inflation rate as companies adjust their prices.
Economists now expect that the bank will delay its interest rates further. ING analysts see the first cut coming as late as in September. ING analysts wrote that:
“The market favours a July start point, but we see the risk for slippage, and it may be that the Fed kicks things off with a 50bp cut in September, just as they did in 2024.”
Read more: Top 3 US stocks to buy as the Fed warns of stagflation risks
GBP/USD technical analysis
GBPUSD chart by TradingView
The daily chart shows that the GBP/USD exchange rate surged and found substantial resistance at 1.3433 in April. This was notable since it coincided with the highest swing in September last year.
It has formed a cup and handle pattern, a popular bullish continuation sign, comprising of a horizontal support and a rounded bottom. The recent pullback is part of the formation of the handle section of this pattern.
A common approach to identify the price target in this pattern is to measure the depth of the cup, and then extrapolate the same distance from the cup’s upper side. In this case, the cup has a depth of almost 10%. Measuring the same distance from the cup’s upper side brings the target price to 1.4778, the highest level since June 2016
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