The GBP/USD exchange rate has pulled back this week as the US dollar index (DXY) has stabilized. It initially rose to a high of 1.3430 earlier this week and then pulled back to the current 1.3300. This article explores what to expect after the latest UK retail sales data, and as the odds of Bank of England (BoE) rate cuts rise. It also mentions that the GBPUSD pair has formed a cup and handle pattern pointing to more gains in the long term.
Bank of England interest rate cuts odds rise
The GBP/USD pair pulled back this week as investors predicted that the Bank of England would start cutting interest rates more aggressively as concerns about tariffs rose.
The bond market is also signaling this, with the yield of the ten-year GILTs falling to 4.5%. It has dropped by almost 10% from its highest point in 2024. It has dropped in the last five consecutive days.
Similarly, the closely-watched five-year yield has dropped to 4% from last year’s high of 4.65%. Bond yields typically drop when analysts anticipate a central bank to cut interest rates.
A key concern for the UK market is that analysts expect the economy to slow this year. In a report this week, the IMF warned that the UK will be one of the most hit economies by these tariffs. It then predicted that the BoE will deliver at least three more interest rate cuts.
The BoE has been one of the most hawkish central banks this year. Unlike the European Central Bank, it has delivered just two cuts this cycle as it remained concerned about the elevated inflation rate in the country.
Data released on Friday shows that the country’s retail sales did well in March. Total sales rose by 2.6% in March, higher than 1.8% in the previous month. Core sales jumped by 3.3%, a big increase from 1.8%.
US dollar index has stabilized
The GBP/USD pair has pulled back because the US dollar index (DXY) has stabilized in the past few days. It initially crashed to a multi-year low of $97.95 earlier this month and then rebounded to its current level of $99.53.
The US dollar has jumped against other popular currencies like the Japanese yen and the euro.
This recovery is primarily because Trump promised not to fire Jerome Powell, the Fed Chair who has maintained a balanced tone on inflation. He has said that the bank will cut rates only if only inflation continues falling.
The US dollar also jumped after Trump signaled that he was open to negotiating with China. He said that Chinese officials were talking to the White House, a statement the Beijing has rejected.
Read more: DXY: US dollar index outlook if Trump fired Fed’s Jerome Powell
GBP/USD technical analysis: C&H points to more gains
The daily chart shows that the GBP/USD exchange rate has surged in the past few months. It rose and hit the crucial resistance level at 1.3430 this week. This was a notable achievement, as it marked the highest level recorded in 2024. It was also the upper side of the cup and handle pattern that has been forming for years. C&H is a popular continuation pattern, and the recent pullback is the formation of the handle section.
In this case, the pattern has a depth of about 10%. Therefore, measuring this distance from the cup’s upper side brings the target price to 1.4770.
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