GBP/USD reached a high of 1.3575 earlier this week, benefiting from global risk appetite and the equity surge driven by Nvidia’s earnings, only to relinquish those gains subsequently. Cable was at 1.3492 on Friday morning, but it fell to daily lows around 1.3450 by the afternoon session, declining despite the FTSE 100 reaching a new all-time record high. The 10-year gilt yield has decreased to around 4.32% — marking the lowest level in more than 15 months. The DXY is currently at 97.60, reflecting a decrease of 0.2% for the day. The 10-year U.S. Treasury yield has dipped below 4%, now standing at 3.978%, marking the first occurrence since November. January PPI reported a robust 0.5% headline and 0.8% core, significantly exceeding consensus expectations. However, the dollar failed to gain traction as the bond market appears more concerned about recession risks than inflationary pressures. The pound remained unaffected by any of those factors. A descending trendline drawn from the 1.3700 January swing high continues to limit every recovery attempt, and the Greens’ surprising by-election victory in Gorton and Denton has introduced the exact type of domestic political uncertainty that Sterling cannot withstand while also confronting a BoE rate cut in March. The pound finds itself in a challenging position, influenced by a record-setting equity market that has the potential to bolster its value, yet hindered by a political upheaval that continues to impede its progress. The tension dissipates downward.
The Greens’ success in the Gorton and Denton by-election impacted Sterling more significantly than any macroeconomic data published this week. The magnitude of Labour’s loss has reignited discussions regarding Prime Minister Starmer’s command, the party’s capacity to maintain its coalition, and the overarching direction of fiscal policy in the UK. Political instability in the UK presents more than just headline risk; it has a direct impact on gilt yields, expectations surrounding BoE policy, and the movement of foreign capital into Sterling-denominated assets. The pound has already reflected some political instability, as markets have absorbed months of speculation regarding Labour’s internal conflicts. However, the by-election outcome surpassed even the most pessimistic projections, transforming what was once considered a secure seat into a clear indication of voter disapproval. The immediate implication for GBP/USD is that the positive feedback loop connecting rising equities and a stronger pound has been disrupted. The FTSE 100 has the potential to reach all-time highs without an increase in Sterling, as the equity rally is fueled by multinational earnings denominated in dollars. In contrast, the pound’s value is influenced by domestic political confidence, which has recently faced a significant setback.
UBS has indicated that the short-term fair value for GBP/USD is approximately 1.33, which is significantly lower than the current levels. The evaluation occurred prior to the outcome of the by-election. Should UBS reassess the model incorporating revised political risk factors, it is probable that the fair value estimate will decline further. The pound’s failure to capitalize on the most robust global equity environment seen in months serves as a significant indicator. When favorable macroeconomic conditions cannot elevate the price, it suggests that the underlying challenges are more formidable than they seem. The prevailing anticipation that the Bank of England will implement an interest rate cut during the March policy meeting represents the primary structural pressure on GBP/USD. The market is reflecting a strong belief in a rate cut, and the speech by BoE Chief Economist Huw Pill on Friday at 13:00 was scrutinized for any indications that could either validate or challenge that anticipation. The rationale for a rate cut is grounded in the weakening UK labor data — recent employment figures were disappointing enough to provoke a significant decline in the pound — and a wider acknowledgment that the UK economy is functioning below its capacity. The Bank of England is navigating a challenging scenario: inflation persists at a level that supports maintaining interest rates, while economic growth is weak enough to necessitate a reduction in rates. Governor Bailey’s recent comments were notably dovish, indicating a shift in the internal dynamics of the monetary policy committee, where a majority now appears to support lower rates.
The interest rate differential is the mechanism through which BoE expectations translate into GBP/USD price action. With the Fed maintaining rates at 3.50%-3.75% and displaying no urgency to make cuts (97.9% probability of rates remaining unchanged through April), each cut from the BoE increases the rate differential favoring the dollar. Should the BoE implement a 25 basis point cut in March while the Fed maintains its position, the differential would shift from approximately 125-150 bps to 100-125 bps. This remains advantageous for the dollar; however, it is the change in direction that influences currency flows, rather than the absolute level itself. Capital shifts towards currencies experiencing stable or increasing rates, while moving away from those with declining rates. The pound finds itself in an unfavorable position within that equation. The two-hour chart presents a clear bearish narrative. The GBP/USD faced resistance at the descending trendline established from the January peak around 1.3700, after momentarily reaching 1.3575 in the middle of the week. The rejection was classic: a steep decline to 1.3450, succeeded by a feeble rebound that did not manage to regain the trendline. The candle structure, characterized by mixed bodies and prominent upper wicks, indicates that sellers are active at every bounce, while buyers do not possess the conviction needed to maintain rallies. The 50-EMA at 1.3510 is currently serving as immediate resistance on the two-hour timeframe. The 200-EMA at 1.3560 is positioned above, further solidifying the bearish framework. On the daily chart, the key level is the 20-day EMA at 1.3550 — cable has struggled to close above this threshold, which serves as the demarcation between “neutral with a bearish tilt” and “outright bearish.” The RSI across both timeframes remains in the range of 40-48, indicating a lack of strong momentum that is slightly negative, yet it has not dipped into oversold territory that could prompt a counter-trend bounce.
From a longer-term perspective, the weekly timeframe reveals an ascending wave of larger degree (A) of B currently in progress, as indicated by Elliott Wave analysis. In this framework, wave 1 of (A) has concluded, a downward correction has been finalized as wave 2 of (A), and the third wave 3 of (A) is currently unfolding on the daily chart. In the context of wave 3, the initial sub-wave i of 3 has been established, followed by a completed correction as ii of 3, and we are currently witnessing the progression of wave iii of 3. On the four-hour chart, wave (i) of iii has developed, and wave (ii) of iii is approaching completion as a local correction. The essential pivot level stands at 1.3338. Should GBP/USD maintain its position above this level, the Elliott structure indicates a potential upward movement towards 1.4050-1.4300 following the conclusion of the current correction. A breakdown below 1.3338 negates the bullish scenario and sets decline targets at 1.3170 and subsequently 1.3000. The current price range of 1.3450-1.3492 is positioned 112-154 pips above the pivot point, providing a significant buffer. However, this cushion could diminish rapidly if the anticipated March BoE cut occurs in conjunction with ongoing political instability.