GBP/USD Price Forecast: Can the Pound Sustain Momentum Amid Economic Pressures and Credit Rating Downgrades?
The GBP/USD currency pair has shown strong momentum over the past few days, breaking above the 1.3350 level and testing 1.3400 for the second time in two weeks. This upward movement comes amidst a weakening US Dollar (USD) following Moody’s decision to downgrade the US sovereign credit rating. As we dive into the details, we'll examine the factors driving the GBP/USD price action, including the economic outlook for both the UK and the US, and the technical levels that could guide future movements in the pair.
USD Weakened by Moody’s Credit Rating Downgrade
The primary catalyst for the recent weakness in the US Dollar stems from the downgrade of the United States’ credit rating by Moody’s. On Friday, the rating agency stripped the US of its top-tier "AAA" status, citing rising national debt and fiscal deficits. Moody’s forecast that the US federal debt would rise to approximately 134% of GDP by 2035, a stark increase from 98% in 2023, and projected the federal budget deficit to widen to nearly 9% of GDP. These concerns have led investors to reassess the US economy’s long-term fiscal health, contributing to the decline in USD.
This downgrade follows similar actions by Fitch in 2023 and Standard & Poor’s in 2011, but it has notably contributed to higher Treasury yields. The 30-year yields broke above 5%, and 10-year yields surpassed 4.5%, leading to some uncertainty in the bond market. While the USD did recover slightly during Tuesday’s session, its weakness in the face of these fiscal concerns has kept it vulnerable, providing the Pound with an opportunity to strengthen.
GBP Supported by UK-EU Trade Deal
On the flip side, the Pound has benefited from positive developments in the UK-EU relations. A major UK-EU trade deal was announced, signaling a breakthrough in post-Brexit negotiations. This deal, hailed as a “reset” in relations, includes provisions for access to UK fishing waters for EU vessels and reduced checks on UK agricultural exports. This new agreement has bolstered optimism about the UK economy, which has historically been supported by closer trade ties with the EU.
The trade deal’s significance lies not only in resolving some of the key issues post-Brexit but also in its potential to strengthen the Pound against the Dollar. As the market reacts to these positive developments, GBP/USD has found support and continues to trade firmly above the 1.3350 level.
Technical Outlook: GBP/USD Bulls Eyeing 1.3400 and Beyond
From a technical standpoint, GBP/USD remains in an uptrend, breaking above the 20-day simple moving average (SMA) and posting small daily gains. However, resistance around the 1.3400–1.3440 zone is proving to be a challenge for the bulls. A decisive break above this range could open the door for a swift rally towards the 1.3645 resistance level, with further targets at 1.3750 and 1.3830. The 1.3400 level is proving to be a key psychological barrier, as seen in the recent failure to hold above it.
Momentum indicators, such as the RSI, are showing bullish signals, with the relative strength index crossing above the neutral 50 mark. However, the resistance near 1.3400 remains significant, and until this level is decisively broken, GBP/USD might face periodic pullbacks. If the pair fails to sustain above this level, a retreat to the 1.3100–1.3200 region could be possible.
US Data and Fed Speeches on the Horizon
The upcoming UK Consumer Price Index (CPI) data and the US Purchasing Managers Index (PMI) are key events to watch for the GBP/USD outlook. The UK CPI is expected to show an uptick, which could further support the Pound, while the US PMI figures are likely to reveal some softness in the manufacturing and services sectors. These economic releases could provide more direction for the pair, but much will depend on how the markets interpret the Fed’s stance on future rate cuts.
The Federal Reserve has been active in tempering expectations of aggressive rate cuts, with Fed officials reiterating that the current tariff and trade policies make it difficult to forecast the domestic economy. Comments from key Fed officials this week could add further volatility to the US Dollar, which remains at the mercy of geopolitical developments and domestic fiscal concerns.
GBP/USD Technical Analysis: Key Levels to Watch
From a technical perspective, GBP/USD has formed a bullish pattern since early May, with the pair holding above the 50-day Exponential Moving Average (EMA) at around 1.3100. The recent rally has seen the pair touch the 1.3400 handle once again, testing key resistance levels. To continue its bullish trajectory, GBP/USD must clear 1.3400 and hold above it, with the next significant resistance at 1.3440.
On the downside, support remains solid at 1.3300, followed by 1.3200. A breach of the latter could signal a more substantial pullback, with the 1.3100–1.3200 region acting as a key support zone. If the pair retreats from its current levels, traders will look to the 1.3100 level to gauge the strength of the bullish trend. A failure to maintain above this level could result in further consolidation.
Conclusion: Is GBP/USD Primed for Further Gains?
The GBP/USD pair remains on a positive trajectory, supported by a weaker US Dollar and improved sentiment around the UK-EU trade deal. While resistance near 1.3400 poses a challenge, the technical indicators suggest that the pair may continue to build bullish momentum, particularly if UK economic data continues to outperform. However, the risks surrounding US fiscal health, as well as the uncertain global economic landscape, make it essential for traders to stay alert to any changes in market sentiment. Given the current dynamics, GBP/USD appears to be a strong buy for those with a medium-term outlook, but short-term volatility could present opportunities for both bulls and bears alike.
