GBP/USD Defends Key Support Attack, but Macro Conditions Signal Further Pain Ahead

• Quotes GBP/USD defend important support in the 1.26 region
• Bank of England is ready to continue interest rate cuts
• UK economy clearly out of breath
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It's been more than a month and a half of a downward trend on the GBP/USD currency pair, driven primarily by the strong US dollar, accentuated by the election of Donald Trump as US President.

On the other side of the Atlantic Ocean, the Bank of England, on November 7, once again cut interest rates by 25 bps, and according to Governor Andrew Bailey, is prepared to make further cuts if inflation continues to decline.

The argument for maintaining monetary easing is also supported by recent data from the British economy, which does not indicate the possibility of a recovery at this phase of the cycle.

Currently, more arguments seem to be on the side of further southward movement even despite at least short-term defense of support in the 1.26 price area.

Let's take a look at the most relevant fundamentals and technicals for the pair now.

BoE, Fed Paths Diverge Along With Economic Indicators

In the face of another deceleration of disinflation and the continuation of relatively favorable conditions in the labor market and the US economy in general, another interest rate cut at the Federal Reserve's December meeting is in question. Currently, the market is pricing such a scenario with just over a 50% probability.

Figure 1. probability of the level of interest rates in the US after the December meeting

It is also worth keeping in mind the effect of Donald Trump's victory, which with his decisions could lead to a pickup in inflation and a slowdown in cuts, which the market seems to be discounting right now.

In the case of the Bank of England, a pause in the cycle is very possible, as indicated by the probability of cuts before the end of the year of only 17%. Much will depend on how the inflation readings published as early as tomorrow shape up, and in the event that forecasts of a jump in price growth dynamics are realized, the BOE's next move should take place no sooner than next February.

The analogous scenario will be treated as a surprise and could push GBP/USD quotes to further multi-month lows.

Figure 2. inflation dynamics in the UK

The broader view of the British economy, shaped by last Friday’s release of extensive data, is stirring a notably pessimistic mood among investors. In Q3 2024, the UK economy expanded by a mere 0.1% quarter-on-quarter, following 0.2% growth in Q2—underscoring a continuation of the downward trend.

Figure 3 GDP data from the UK economy

The whole picture is completed by weaker-than-forecast data from industrial production and retail sales, which could set the stage for a return to negative economic growth in the final quarter of this year.

GBP/USD Technical View: 1.26 Support Holds Key

The attempt to break out of the support level near 1.26 the first time clearly failed for the supply side.

Bulls record a local rebound, however, the downtrend supported by strong momentum continues. If the sellers keep up the pressure, the descent below the indicated area should become a reality, and then the way will be opened for an attack on much lower located targets.

The attention of the bears may focus on 1.23, where this year's minima fall at the same time.

Figure 3 Technical analysis of GBPUSD.

The analogous signal will be the exit above the confluence of the downward trend line and local resistance located near 1.2850, which will give a chance to approach even the round barrier of 1.30.

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Disclaimer: This article is for informational purposes only. It is not intended as a solicitation, offer, advice, or recommendation to purchase any asset. All investments should be evaluated from multiple perspectives, and it is important to remember that any investment decision and the associated risks are the sole responsibility of the investor. Additionally, no investment advisory services are provided.