GBP/USD Forecast: Policy divergence keeps cable supported for now

• GBP/USD forecast remains modestly bullish despite UK growth concerns
• Dollar weakness persists as markets eye dovish Fed expectations
• Bank of England likely to lag Fed in rate cuts, keeping sterling supported

 

The pound edged higher against the dollar as the greenback lost steam following its brief post-FOMC recovery. What’s interesting here is that the move came despite some rather disappointing UK PMI numbers, which showed momentum in Britain’s economy slipping. Yet, the market seems more focused on the policy divergence story — with the Bank of England likely to keep rates elevated for longer than the Federal Reserve. This is preventing the GBP/USD forecast to turn bearish just yet, with the pair looking to consolidate around the $1.35 handle.

 

Dollar makes weaker start to the week

 

The dollar softened at the start of the week, even as several Fed officials struck a more cautious note on rate cuts. Today, the dollar index was trading flat-ish as the major currency pairs traded mixed and without much conviction. 

 

Meanwhile, from a data point of view, US PMIs came broadly in line with forecasts, though the Richmond manufacturing index disappointed, highlighting the softer tone in recent American data. This backdrop keeps pressure on the dollar, with downside risks dominating the near-term outlook.

 

This week we have plenty of Fed speakers. Yesterday, policymakers such as Musalem, Bostic, and Hammack all sounded relatively hawkish, but their stance failed to sway markets much. Investors appear more convinced by softer economic data and the Fed’s own guidance pointing towards rate cuts ahead. More Fedspeak is on the way. Jerome Powell is due to speak today, though he’s unlikely to deviate from last week’s comments.

 

UK PMIs signal weakening momentum

 

Across the Atlantic, UK business activity clearly slowed in September. The services PMI fell to 51.9 from 54.2, manufacturing slipped further into contraction at 46.2, and, as a result, the composite index dropped to 51.0 from 53.5. The figures underline a loss of confidence as firms brace for potential tax hikes in the coming budget.

 

Normally, such soft data would weigh on the GBP/USD forecast. But the cablehas held up relatively well, partly because inflation in Britain is still running close to 4% — almost double the BoE’s target. This keeps the prospect of UK rates staying higher for longer alive, contrasting with expectations of further Fed cuts.

 

Technical GBP/USD forecast: Key levels to watch

 

 

With EUR/GBP touching a two-month high, sterling’s resilience may not extend across the board. But against the dollar, the narrative still tilts in favour of the pound, at least until the Fed’s dovish turn is fully priced in. Indeed, the GBP/USD chart was holding steady around the 1.35 handle at the time of writing. Short-term resistance is seen around 1.3540 to 1.358, while support comes in between 1.3434 to 1.3460.

 

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R