GBP/USD Forecast: Investors struggle to find a reason to buy the British pound

GBP/USD Forecast: Investors struggle to find a reason to buy the British pound
  • GBP/USD failed to keep its footing following Tuesday’s modest rebound.
  • BoE announced temporary purchases of long-dated UK government bonds.
  • IMF voiced its criticism of the British government’s fiscal plan.

GBP/USD ended up posting modest gains on Tuesday but lost its recovery momentum early Wednesday. As markets assess the latest announcement from the Bank of England (BoE), the pair stays near 1.0700 but investors are likely to continue to find it highly risky to bet on a steady rebound in the British pound. 

Commenting on the recent market developments, “it’s hard not to draw the conclusion that we will need significant monetary policy response,” Bank of England (BoE) Chief Economist Pill said late Tuesday. Pill further noted that they will not be selling gilts into a dysfunctional market but these remarks did little to nothing to help the sterling find demand.

Meanwhile, the International Monetary Fund said that the UK government’s proposed budget would likely increase inequality. “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” the IMF said in criticism of the fiscal plan.

Earlier in the day, Sky News reported that British finance minister Kwasi Kwarteng was planning to ask financiers not to bet against the pound when he meets with bankers on Wednesday. According to Reuters, however, a source at the finance minister dismissed that report. 

On Wednesday, the BoE announced that they will carry out temporary purchases of long-dated UK government bonds from September 28 to restore orderly market conditions. Although the initial reaction initiated a bullish spike to 1.0850, GBP/USD quickly erased its gains as the BoE noted that the annual target of £80 billion stock reduction will be unaffected by this decision.

In the second half of the day, Goods Trade Balance and Pending Home Sales data from the US will be looked upon for fresh impetus. As of writing, US stock index futures were down between 0.9% and 1.6% on the day. Unless Wall Street’s main indexes turn north after the opening bell, the dollar should be able to preserve its strength and limit GBP/USD’s potential recovery gains.

GBP/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart stays slightly above 30 on Wednesday, pointing to a lack of recovery momentum. On the upside, 1.0750 (20-period SMA on the four-hour chart) aligns as first resistance before 1.0800 (psychological level) and 1.0850 (daily high, static level).

On the downside, 1.0700 (psychological level, static level) forms immediate support before 1.0600 (psychological level, static level) and 1.0500 (psychological level, static level).

Written by Judith Nistro