- Conflicting factors are preventing GBPUSD from finding a clear direction.
- The Bank of England will disappoint markets with the magnitude of its monetary tightening.
The British pound is consolidating against the US dollar amid persistently high geopolitical risks and uncertainty over the Bank of England's monetary policy. The futures market expects the Bank of England to raise the repo rate in September and again in December. However, the OECD believes the central bank will turn a blind eye to the highest inflation among G10 countries and will keep borrowing costs at 3.75% throughout 2026.
Due to high yields on UK debt, sterling is sensitive to changes in global risk appetite and futures market expectations of faster monetary tightening by the Bank of England compared to the Federal Reserve. This factor, along with five consecutive all-time highs for the , has provided support for the . As soon as the broad stock index pulled back, the pair plummeted.
The pressure on the pound is exerted by the weakness of the UK economy and labor market, as well as the risks of a change of prime minister following the defeat of the Labor Party in the local elections. Investors fear that the new head of government will aggressively use fiscal stimulus, thereby inflating public debt and demanding new bond issuance. The OECD predicts that the country's debt will rise from 98.8% of GDP in 2023 to 105.4% in 2027 and recommends that London adhere to the principles of fiscal consolidation.
Therefore, a variety of factors are contributing to a medium-term consolidation of GBPUSD. Events in the Middle East will help the couple determine the direction of their future movement. For now, the White House appears reluctant to significantly escalate military action against Iran unless the situation deteriorates further. If this happens, an escalation of the conflict will boost demand for the US dollar as a safe haven asset and push the pound towards $1.31.
On the other hand, the conclusion of a deal with Iran, even if its terms are vague and key issues are deferred to a later date, will provide fresh impetus for a rebound in US stock indices and an improvement in global risk appetite. GBPUSD will head towards 1.37.
Traders should also keep in mind a possible surprise from the Federal Reserve. According to Morgan Stanley, the first FOMC meeting under the leadership of Kevin Warsh will shake financial markets and set the stage for a prolonged bearish trend in the US dollar.
The FxPro Analyst Team
