The GBP/USD currency pair has continued its upward momentum for the second consecutive day, buoyed predominantly by the ongoing weakening of the US dollar. Investor sentiment remains tilted toward dollar selling due to expectations of interest rate cuts from the Federal Reserve and concerns over the US government shutdown. Despite receiving somewhat unimpressive economic data from the United Kingdom, the pair has managed to recover from recent lows, suggesting that dollar weakness is the dominant driver behind the recent price action.
UK economic indicators released this week showed modest growth. The Office for National Statistics reported a 0.1% expansion in the UK economy for August, aligning with market expectations but revised downward from earlier estimates. Industrial Production increased by 0.4%, rebounding from a decline the previous month, while Manufacturing Production rose by 0.7%, outperforming estimates. However, the UK trade deficit widened to £5.2 billion over the three months ending in August, primarily due to decreased exports to the US and European Union, which partially weighed on the currency.
Market reactions to UK data remained subdued, partly reflecting skepticism about the Bank of England’s monetary policy outlook. Recent employment reports pointed to a cooling labor market, with wage growth slowing and unemployment slightly rising. These figures suggest that further interest rate reductions may be on the horizon, although structural concerns have limited upward pressure on the pound. Meanwhile, dovish signals from the Federal Reserve, notably Chair Jerome Powell’s comments on the labor market’s stagnation, have reinforced market expectations for rate cuts later this year.
Geopolitical developments, including the US government shutdown and ongoing trade tensions with China, continue to pressure the US dollar. The shutdown has potential economic costs estimated at approximately $15 billion weekly, further undermining confidence in the dollar’s near-term stability. Additionally, new restrictions and tariffs between the two nations have raised concerns about sustained trade disruptions.
Looking ahead, investors await speeches from key Federal Reserve officials for further guidance on the outlook for interest rate policy. Technical analysis indicates the pair remains supported above the 1.3400 level, with targets near 1.3480 and potentially higher if bullish momentum persists. Conversely, a sustained drop below support levels could expose the pair to declines toward 1.3250. The prevailing macroeconomic risks call for cautious positioning as markets assess the evolving economic and geopolitical landscape.
