GBP/USD: Where is it heading between monetary policy and economic data?

The GBP/USD pair is witnessing a notable decline from the gains it recorded at the start of the week, trading around 1.3520 during the Asian session on Tuesday.

In my view, this pullback does not merely reflect temporary strength in the US dollar but also illustrates a sense of anticipation across global markets regarding the Federal Reserve’s monetary policy path.

I believe the pair’s current movement cannot be viewed in isolation from the broader context, which is a mix of persistent inflationary pressures in the United States and uncertainty over the actual timing of the first rate cut after months of tight monetary policy.

The recent appreciation in the US dollar reflects renewed confidence among some traders that the Federal Reserve may slow the pace of rate cuts, despite current expectations indicating a probability above 89% for a 25-basis-point cut at the upcoming September meeting. In my opinion, the market may be overestimating the dollar’s short-term strength, since such high expectations mean that any negative surprise in US economic data could quickly translate into downward pressure on the greenback, thereby allowing sterling to regain momentum.

Investors this week are awaiting a series of critical US data releases, starting with August’s ISM Manufacturing PMI, followed by the ADP employment report, and culminating with Friday’s Non-Farm Payrolls (NFP). In my estimation, these figures will serve as the true test of the Fed’s willingness to proceed with a rate cut. Should labour market results come in weaker than expected, the Fed may be forced to prioritize employment over inflation control, a move that would weaken the dollar and provide a boost to the British pound.

On the other hand, the outlook for sterling itself remains clouded. Despite the UK facing inflationary pressures similar to those in the US, the Bank of England’s recent stance leans toward keeping interest rates elevated for longer, as highlighted by MPC member Catherine Mann’s remarks. From my perspective, this defensive policy may support the British currency relatively, as it signals to investors that the BoE is less inclined toward monetary easing compared to the Fed, keeping sterling relatively attractive in terms of capital flows.

The timing of Parliament’s return and the Treasury Committee’s questioning of BoE policymakers add another layer to sterling’s movements. I believe that any hints from the committee about maintaining higher rates for an extended period will act as a safety net for the pound, even in the face of temporary dollar strength. Conversely, any signals suggesting a potential rate cut before year-end could undermine market confidence in sterling and open the door to further weakness.

Interestingly, the pound managed to start the week with a modest rise despite the absence of major data, revealing a degree of resilience in demand for the currency. I see this behaviour as reflecting a conviction among some investors that the medium-term trend still favours sterling, particularly if the Fed continues to send mixed signals about rate cuts. However, this resilience remains fragile in the face of strong US data that could quickly restore the dollar’s dominance.

As for the ISM Manufacturing PMI, although its low response rate reduces the weight of the final reading, markets will remain sensitive to any surprises. I expect that any print below the 50 threshold will be taken as an additional sign of economic slowdown, reinforcing the case for a rate cut. Should this occur, sterling would likely find room to recover its recent losses and potentially target the 1.36 level again in the short term.

The biggest challenge, in my view, lies in Friday’s NFP report, which will largely dictate the Fed’s decision at the September 17 meeting. If the data come in weak or significantly below expectations, we could see confirmation of a rate cut, pressuring the dollar and giving sterling room to rise. Conversely, if the figures are strong enough to reignite inflation concerns, this could translate into a potential delay in easing and restore the dollar’s momentum.

I believe the most likely scenario is mixed data: relative strength in wages alongside a noticeable slowdown in job creation. Such a scenario would leave the Fed in a difficult position, but it would not prevent it from delivering a September rate cut, especially given rising political and economic pressures to support the labour market. In this case, I expect GBP/USD to remain range-bound between 1.3450 and 1.3650 in the coming weeks, with a slight upward bias if the data confirm labour market weakness.

In conclusion, the trajectory of GBP/USD in the days ahead will be a direct reflection of the balance between a hesitant Federal Reserve and a more hawkish Bank of England. In my opinion, traders should not be swayed by intraday fluctuations but instead focus on the bigger picture: the dollar is gradually losing the momentum it built over the past two years, while sterling—despite its fragility—may find in the BoE’s resolve a pivot point that helps it regain some influence in the global currency market.

Technical analysis of ( GBPUSD ) prices

The chart of the GBP/USD pair shows that the pair continues to move within a sideways channel with a slight upward bias, after bouncing from the support area near 1.3450. The price managed to stabilize above the moving average, reflecting an improvement in bullish momentum. Additionally, the stochastic indicator signals positive momentum, supporting the likelihood of a continued upward movement in the near term.