GBP/USD Rate In "A Bullish Turn of Events" Says Convera's Vessey

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The Pound to Dollar exchange rate's technical outlook has improved after the jump in value that followed midweek developments in the U.S. says a leading market analyst.

Convera's George Vessey says Pound-Dollar's recent fall from $1.28 to around $1.25 against the US dollar over the last few weeks saw it break below some key moving average support levels, exposing greater downside risk.

"But after yesterday’s US data and dollar weakness sterling was able extend its rebound from 7-week lows to move back above the 200-day moving average – a bullish turn of events," says Vessey.

Pound Sterling rose 0.60% on Wednesday to close at 1.2652, its largest daily gain since early March, after the ISM said its services PMI read at 51.4% in March, notably lower than the 52.6% printed in February and below expectations for an increase to 52.7%. The Services Paid component - which provides a decent indicator of inflationary pressures in the sector - fell from 58.6% to 53.4%, its lowest level in four years.

The Dollar has outperformed in 2024 thanks to a run of better-than-expected data releases that have prompted investors to lower expectations for the quantum of rate cuts to come from the Fed this year.

The Fed, like other central banks, is particularly concerned about the evolution of inflation in the services sector, fretting that it might prove resistant to further falls, potentially stifling the disinflation process.

Above: GBP/USD at daily intervals showing the move back above the 200-day moving average. Track GBP/USD with your own custom rate alerts. Set Up Here

The decline in the prices paid component of the ISM services PMI is therefore significant in this regard.

"The prices subindex has generally had a good leading relationship with core services inflation in the past and is now consistent with underlying services inflation dropping to around pre-COVID rates before long," says Oliver Allen, Senior U.S. Economist at Pantheon Macroeconomics.

Regarding the near-term outlook, Vessey says Pound-Dollar's reaction to the upcoming U.S. jobs report could be critical in determining whether the currency pair moves back into the higher realms of its narrow year-to-date range or breaks towards fresh lows.

"Fundamentally, it could be that investors have come to terms with the high-for-longer Fed narrative now that less than three rate cuts are being priced in. Therefore, assuming US data doesn’t significantly surprise to the upside, further dollar gains may be more elusive, thus limiting the downside risk for GBP/USD. Reminder – on average, GBP/USD has risen by over 1% in the month of April over the past two decades," he explains.