GBP/USD makes half-hearted bounce as USD traders take profit

• GBP/USD edges higher on Friday as US Dollar traders take profit following a strong rally for the Greenback to new 2024 highs. 
• The bounce remains strained because of the release of weak UK GDP growth data clouding the outlook. 
• Some analysts remain positive about the outlook for the UK despite the data, and this supports Sterling. 

GBP/USD edges higher on Friday, reaching the 1.2680s, as traders reduce their short exposure before the weekend. GBP/USD claws its way up from intraday oversold levels reached on Thursday when it registered near 2.0% losses on the week. This came after the US Dollar (USD) outperformed due to positive US economic data, the residual effect of Trumponomics, and upbeat comments from the Federal Reserve (Fed) Chairman Jerome Powell.

By rights, the pair should still be falling after the release of weak UK growth on Friday. However, it is possible traders are now judging the US Dollar as overvalued. The US Dollar Index (DXY), which gauges the Greenback's value against six major currencies, reached a new 2024 high on Thursday, which could be restraining Dollar-traders' "irrational exuberance".  

Although it seems counter-intuitive, the Pound Sterling (GBP) is actually strengthening despite the release of negative UK Gross Domestic Product (GDP) growth data showing the economy shrank by 0.1% in September. This was lower than the 0.2% expected and 0.2% of the previous month. 

What's more, in Q3, UK preliminary GDP rose by 0.1% QoQ - decelerating from the 0.5% recorded in Q2 and undershooting the 0.2% estimate. Ordinarily, this would be expected to be accompanied by a sell-off in the Pound. However, due to an overbought Dollar trade and the market's continued faith in the outlook for growth in the UK, it has not. 

For advisory service Capital Economics, for example, the data has not materially changed its views on the outlook for Bank of England (BoE) policy or interest rates - a key driver of FX valuations. Lower interest rates are generally negative for Sterling as they reduce capital inflows and vice versa for higher rates. Yet, despite the poor economic data, they do not see the BoE cutting interest rates in December.

According to Capital's Deputy Chief UK Economist Ruth Gregory, the GDP data means the economy grew at "..a snail's pace (in Q3). However, this doesn't mean the UK is on the cusp of another recession. And while today's data raises the chances the Bank (BoE) will cut rates again in December, we are sticking to our view that the Bank will keep rates unchanged at 4.75% in December before cutting rates by 25 basis points again in February," 

GBP/USD touches five-month lows after Chairman Powell remarks

GBP/USD is making a slow recovery from over four-month lows reached on Thursday after US data showed an above-expectations rise in factory-gate prices, as measured by the Producer Price Index (PPI), in October and US Jobless Claims falling below estimates in the week ending November 8, driving the Dollar higher and the Cable pair to a new low. 

The two data points are particularly relevant to Fed policy given its dual mandate of keeping inflation under control and fostering full employment. Later in the day, Fed Chair Powell drove the USD to an even higher high after he said that the US economy was in relatively good shape and the Fed would not need to cut interest rates as aggressively as he had previously thought. 

Technical Analysis: GBP/USD trends lower

GBP/USD retreats to support in the mid-1.2600s (red dashed line in the chart below) and makes a half-hearted stand. 

However, the pair is in a downtrend on a short and medium-term trend basis, and given the technical principle that "the trend is your friend," the odds favor bears pushing prices even lower.

GBP/USD Daily Chart 

Assuming a break below the 1.2630 Thursday low, GBP/USD will probably start descending to the next downside target at around 1.2613, the late June lows (red dashed line). Below that, the next target lies at 1.2500 (round number and psychological level), followed by 1.2452 (early May lows).

The Relative Strength Index (RSI) momentum indicator is nearly oversold but not quite. If it enters oversold territory, it will advise short-holders not to add to their positions. 

The longer-term trend, it could be argued, is still bullish, indicating the risk and possibility of GBP/USD recovering if a longer-term upcycle kicks in.