Sterling trading was mixed earlier in the week

• Sterling is trading mixed across its key pairs at the start of the new week.
• GBP is higher against the US dollar as recession concerns haunt the USD – against the yen, it weakens on strong Japanese data.
• Technically, GBP/USD continues to rise in an established short-term uptrend.

The British pound (GBP) is trading among the most heavily traded pairs on Monday, despite positive economic data released recently. The British pound is gaining against the US dollar (USD), but trading flat against the euro (EUR) and falling against the Japanese yen (JPY). GBP’s recent moves have less to do with UK news or data and more to do with volatility in its peers.

Sterling mixed but resilient after string of positive data

Sterling is trading mixed at the start of the new week. Recent assessments of the UK economy have been largely positive, with some economists describing it as a “golden nugget” balance between “not too cold” and “not too hot”.

Headline inflation is around the Bank of England’s (BoE) target of 2.0%, and services inflation – which has so far remained particularly high – eased to 5.2% in July from 5.7% previously, returning to a long-term average of around 3.5%.

UK retail sales data last week showed a July rebound of 0.5% from a negative 0.9% in June. The unemployment rate fell to 4.2% in Q2 from 4.4% in Q1, and Gross Domestic Product (GDP) rose 0.9% from 0.3% in the same period.

Declining global inflation and easing stubbornly high services inflation led the BoE to cut interest rates at its August meeting to 5.00% from 5.25%. Lower interest rates tend to depress the value of the GBP by reducing foreign capital inflows. Market-based indicators of whether interest rates will fall further give a slightly less than 50% chance of a further 0.25% cut in September. Economists at Capital Economics expect two more cuts of 0.25% before the end of the year.

Sterling rises against the USD but falls against the JPY

Against the US dollar, GBP rose two-tenths of a percent to trade in the 1.2950s on Monday, extending its gains from the previous week. The move comes amid weakness in the US dollar following comments from Chicago Federal Reserve Bank (Fed) President Austan Goolsbee on Friday, who said the US labor market and other leading economic indicators were “a flash warning. signs” including rising levels of credit card delinquencies. His words reignited recession worries, weighing on the US currency.

EUR/GBP is a warm gain/loss gap with little new information or data to drive either currency in the pair.

The pound is lower against the Japanese yen (JPY) after data from Japan late on Sunday showed that Japan’s machinery orders rebounded by a stronger-than-expected 2.1% in June, following a decline of 3.2% in the previous month.

Yields on 10-year Japanese government bonds rose to 0.9 percent following the data, helping support the highly correlated yen. JPY has already rallied after Japanese GDP data released last week surprised to the upside, showing the economy expanded 0.8% QoQ in Q2, reversing Q1’s 0.6% contraction and beating expectations of 0.5 %.

The Bank of Japan (BoJ) also surprised markets in July after it decided to raise interest rates from a band of 0.0%-0.10% to 0.25% due to rising inflationary pressures. This comes after successful spring wage negotiations gave workers more disposable income. The BoJ is expected to raise interest rates even higher before the end of the year.

Technical analysis: GBP/USD continues short-term rally

GBP/USD is extending its sequence of higher highs and lower lows in the 4-hour timeframe. This indicates that the short-term trend is bullish, and given that “the trend is your friend”, it is biased to continue rising.

GBP/USD 4 Hour Chart

GBP/USD is likely to extend higher to the next target at 1.3042 (July 17 high).

The Relative Strength Index (RSI) has climbed into the overbought zone, indicating a growing risk that the pair could pull back. Previous highs at 1.2940 could provide a level of support for any pullback that materializes. The round number of 1.2900 is another level the pair could fall to in case of a correction.

The medium and long-term trends remain opaque and more ‘sideways’ than directional, with price action trapped in the range between 1.2300 and 1.3042 since November 2023.