GBP/USD edged higher to 1.3371 on Tuesday. Markets have scaled back expectations of a Bank of England rate hike following the decline in oil prices.
Brent crude fell to 100 USD per barrel after Donald Trump left open the possibility of a diplomatic solution with Iran. An increase in regional oil supplies added to the downward pressure on prices, easing concerns about an immediate supply shortage.
Bank of England officials stressed last week that the outlook for inflation and interest rates will largely depend on oil and gas prices in the coming months. Markets now estimate the probability of a Bank of England rate hike in November at approximately 80%, and that of another increase before year-end at around 56%.
Attention is also gradually shifting to the UK autumn Budget. According to media reports, the government is considering extending the new property tax to homes worth more than 1.5 million USD.
At the same time, the US dollar remains supported by expectations of further Federal Reserve rate increases, continuing to limit the scope for a GBP/USD recovery.
Technical Analysis
On the H4 GBP/USD chart, the market completed an upward move towards 1.3399, followed by a correction to 1.3358. The pair has now broken above the downward channel at 1.3381, opening the way for another move higher towards 1.3431, followed by a decline to 1.3390.
The MACD indicator supports this scenario. Its signal line remains below zero and is pointing firmly upwards.
On the H1 GBP/USD chart, the market has formed a narrow consolidation range around 1.3380, currently extending downwards to 1.3358 and upwards to 1.3385.
A move higher towards the local target at 1.3431 is expected.
The Stochastic oscillator supports this scenario. Its signal line is above 50 and is pointing firmly upwards, with a move towards 80 expected in the short term.
Conclusion
GBP/USD remains in limbo as markets scale back expectations of a Bank of England rate hike following the decline in oil prices. The probability of a November rate hike remains elevated at around 80%, while that of another increase before year-end stands at approximately 56%. Attention is also turning to the UK autumn Budget. Meanwhile, expectations of further Federal Reserve tightening continue to support the US dollar and limit sterling’s upside potential.
From a technical perspective, the pair is expected to move higher towards 1.3431 in the short term. Once this move is complete, the H4 scenario envisages a decline towards 1.3390.
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