GBP/USD Latest: rate differentials drive the momentum higher

GBP/USD has been on a strong upwards path the last few weeks as the British pound emerges as the best performing major currency after a continuation of solid data allowed the Bank of England to keep rates unchanged. As with the hiking cycle, it is now a game of rate differentials in the FX space, with currencies whose central banks are seen as having better grip of monetary policy outperforming. The Bank of England’s (BoE) hawkish stance at its latest meeting saw GBP/USD push the 1.33 threshold for the first time since March 2022, but the pair has not stopped there. Before a reversal on Wednesday, the pair topped 1.34.

GBP/USD daily chart

Past performance is not a reliable indicator of future results.

The fact that the Federal Reserve went ahead and cut rates by 50 basis points las week – something that had been mostly priced out prior to the meeting given resilient US economic data – brought further weakness to the US dollar. Compared to the BoE, markets now believe the Fed is going to have to cut harder and faster. Current pricing shows a 61% chance of another 50 bps cut in November, which would mean a whole percentage point of cuts in just two meetings, not necessarily the best mood setter for traders. 

Furthermore, markets anticipate 78 bps of cuts by year end and 193 bps in the next 12 months. For the BoE, it is 40 bps by year-end and 134bps by September 2025. As things stand right now, where economies seem to be holding up well enough as the cutting cycle begins in developed economies, the playoff between rate differentials is a key driver in forex markets, and so the currency with less bps of cuts priced in tends to be dominating. In this case, GBP has been outperforming USD, leading to GBP/USD raking in the gains. 

That said, the strength behind the fundamental reasoning can quickly wear out. The strength in GBP due to higher rates will start to get discounted in the price and therefore buyers may struggle to find any further motivation to push to new highs unless the differential becomes wider. Because of this, monetary policy developments remain a key driver for GBP/USD and could well likely see this playoff continue until the end of the year. 

Technically, the path of least resistance remains higher with Wednesday’s correction evidence of this as the pullback was short-live and corrected on Thursday. The bullish bias should be intact as long as the pair remains above 1.32. A break below this level could start to see some weakness creep in, especially if the RSI is rejected once again at the 70 mark and starts to turn lower.