The British pound (GBP) gained some ground against the US dollar (USD) on Tuesday, as the greenback weakened amid lower US Treasury yields and disappointing US consumer confidence data. The GBP/USD pair traded above the 100-day simple moving average (SMA) at 1.2642, which had acted as a strong support level in the previous sessions.
US yields and consumer confidence weigh on the dollar
The US dollar came under pressure on Tuesday, as the benchmark 10-year Treasury yield dropped to its lowest level since August 11 at 1.28%. The decline in yields was driven by a combination of factors, including the uncertainty over the Federal Reserve’s tapering timeline, the impact of Hurricane Ida on the US economy, and the geopolitical tensions in Afghanistan.
Additionally, the US consumer confidence index fell sharply to 113.8 in August from 125.1 in July, according to the Conference Board. This was the lowest reading since February and well below the market expectation of 123. The report showed that consumers were less optimistic about the current economic conditions and the short-term outlook, mainly due to the resurgence of COVID-19 cases and inflation concerns.
The weak consumer confidence data cast doubts on the strength of the US economic recovery and reduced the odds of an imminent Fed tapering announcement. This, in turn, weighed on the dollar and boosted the appeal of other currencies, such as the pound.
UK inflation expectations support the pound
The British pound found some support from the rising inflation expectations in the UK, which increased the chances of an earlier-than-expected interest rate hike by the Bank of England (BoE). According to a survey by YouGov and Citi, UK households expect inflation to rise to 3.3% over the next year, up from 2.9% in July. This was the highest level since November 2013 and above the BoE’s 2% target.
The survey also showed that households expect interest rates to rise to 0.5% over the next year, up from 0.4% in July. This suggested that consumers were anticipating a more hawkish stance from the BoE, which has recently signaled that some modest tightening might be needed in the medium term to keep inflation under control.
The BoE will hold its next monetary policy meeting on September 23, and investors will be looking for any clues on its tapering plans and rate outlook. The BoE is widely expected to keep its policy settings unchanged for now, but any hints of a sooner-than-expected rate hike could boost the pound further.
GBP/USD technical outlook
The GBP/USD pair has been trading in a narrow range between 1.2566 and 1.2611 for most of August, as both currencies faced headwinds from various factors. However, on Tuesday, the pair broke above this range and climbed to a high of 1.2665, before retreating slightly to 1.2644 at the time of writing.
The pair is now trading above its 100-day SMA at 1.2642, which could act as a support level in case of a pullback. The next resistance level is seen at 1.2708, which is the 20-day SMA and also coincides with a horizontal line that has capped several attempts to rally since July. A break above this level could open the door for further gains towards 1.2784, which is the 50-day SMA and another key resistance zone.
On the downside, if the pair fails to sustain above its 100-day SMA, it could fall back to its previous range and test its lower boundary at 1.2566, which is also near the lower Bollinger band on the daily chart. A break below this level could trigger more selling pressure and push the pair towards 1.2530, which is a major support level that has held since April.
