Sterling extends gains amid BoE-Fed policy divergence

• Sterling extended its positive traction against the US dollar, capturing 1.3300.
• GBP/USD is set for another busy week dominated by US economic events.
• Sterling produced a technical breakout on the back of an upbeat RSI with more upside likely.

The British pound (GBP) extended its position against the US dollar (USD) after the previous week’s revival as the GBP/USD pair reached its highest level since March 2022 above 1.3300.

Sterling was flat during the central bank week

The bullish potential remained intact for the GBP/USD pair as the pound capitalized on the monetary policy divergence between the Bank of England (BoE) and the US Federal Reserve (Fed), highlighted in the good week for central banks.

The Fed opted for a 50 basis point (bps) interest rate cut on Wednesday, bringing the federal funds rate to a range of 4.75%-5.0%. The summary of economic projections, the so-called Dot Plot, suggested a total of 100 bps of rate cuts for this year and next.

Instead, the BoE decided to leave the policy rate on hold at 5.0% on Thursday, as Governor Andrew Bailey warned that policymakers “need to be careful not to cut too quickly or too much”.

Central bank imbalances added further legs to the pair’s uptrend, leading it to a new 30-month high at 1.3315 on Thursday. Buyers remained in control ahead of the weekend, despite deteriorating risk-on sentiment amid renewed concerns about China’s economic slowdown.

Earlier in the week, GBP/USD largely held its recovery mode around 1.3200 as traders preferred to stay on the sidelines, refraining from placing any directional bets on the main direction on bank decisions central.

Tuesday’s US retail sales data came in strongly and briefly lifted sentiment around the US dollar on “soft landing” optimism, but that quickly changed with the Fed’s verdict. Retail sales rose 0.1 percent last month, after an upwardly revised 1.1 percent rise in July, the U.S. Commerce Department’s Census Bureau said.
Meanwhile, data released by the Office of National Statistics (ONS) on Friday showed that UK retail sales rose 1.0% in August after falling 0.5% in July. The data beat the expected increase of 0.4% in the reported month.

PMI, Powell and PCE in focus

With the Fed and BoE policy decisions, focus now shifts to global business PMI data and US personal consumption expenditure (PCE) inflation data due next week.

It’s a busy start to the week with preliminary S&P Global Manufacturing and Services PMI data arriving from the UK and US on Monday. Tuesday and Wednesday are relatively quiet, as only US Conference Board consumer confidence data and US new home sales, respectively, will be released.

On Thursday, the US calendar will feature the final revision of second-quarter Gross Domestic Product (GDP), along with data on durable goods and jobless claims. On that day, however, the main focus will be on Fed Chairman Jerome Powell’s opening remarks at the US Treasury Market Conference in New York.

Traders will closely scrutinize his speech heading into the core US PCE price index data due on Friday.

In addition to macro data releases, speeches from several Fed policymakers and geopolitical developments in the Middle East could also emerge as market movers.

GBP/USD: Technical Outlook

As seen on the daily chart, the GBP/USD pair settled above the downtrend line resistance on Wednesday, then at 1.3199, producing a technical breakout.

Since then, buyers have maintained control, with the 14-day Relative Strength Index (RSI) holding comfortably above the 50 level, currently near 65.50, justifying the bullish outlook.

However, further upside requires acceptance above the 1.3300 level on a daily closing basis. If this materializes, the next higher barrier is seen at 1.3350 before further buying opportunities emerge, necessitating a test of the 1.3400 threshold.

Alternatively, any pullback could meet initial demand at the bearish trendline resistance that has now turned support at 1.3195, below which the 21-day simple moving average (SMA) at 1.3166 will be challenged.

If the sellers manage to find a strong position below this level, it is likely to initiate a new downtrend towards the July 17 high of 1.3045.

The 100-day SMA at 1.3000 will be the line in the sand for sterling buyers.