The pound, paired with the dollar, hit a nearly three-month low at 1.3313, its lowest level since December 10 of last year. The downward dynamics of GBP/USD are primarily due to the strengthening greenback, which is in demand as a safe asset amid rising risk-averse sentiment. Recent events in the Middle East overshadowed all other fundamental factors, enabling the safe dollar to solidify its positions across the market. The GBP/USD pair was no exception, especially since recent developments in the UK have additionally pressured the pound.
Recall that last week, there were by-elections in the British constituency of Horton and Denton (Manchester) following the resignation of MP Andrew Gwynne. The results of this election became a true political sensation in the UK. The Labour Party has continuously held this constituency since 1922, for the last 104 years. Even during periods of significant national party defeats, this territory remained with them. However, this year, the Labour Party lost—so to speak, "spectacularly," securing only 25.4% of the vote and coming in third place. The Green Party candidate won, marking a historical first for the party in parliamentary by-elections.
Only a year and a half ago, during the 2024 general elections, the Labour Party won here by a significant margin, garnering over 50% of the vote. However, under Keir Starmer's leadership, the ratings of this political force have "reset." This is precisely why the pound found itself under pressure: analysts link this outcome not only to support for the Greens but also to a "protest vote" from traditional Labour voters dissatisfied with the current government's policies.
This is a negative signal for the British currency, as any political uncertainty is a risk for the markets. Among analysts, there are justified concerns that a power struggle may break out within the Labour Party, potentially paralyzing government operations. Additionally, the market fears that in an attempt to "win back" voters, Starmer and Finance Minister Rachel Reeves may ease budgetary discipline, increasing debt and jeopardizing financial stability.
Another factor putting pressure on the pound is weak UK labor market data and dovish signals from the Bank of England. Recall that the unemployment rate in the UK rose to 5.2%—the highest reading since 2021, when the country was recovering from the coronavirus crisis. Meanwhile, the youth unemployment rate (ages 18-24) jumped to 16.1%.
The number of claims for unemployment benefits increased by nearly 28,600—this is the highest figure since spring 2020. The number of officially employed individuals decreased by 11,000 in January compared to the previous month, indicating that businesses have become much more cautious in hiring new employees. Additionally, the average wage growth rate in the private sector slowed to 3.4%—the lowest level since 2020.
Weak employment data has heightened expectations that the Bank of England will begin to cut interest rates this year faster than previously anticipated. Moreover, Bank of England Governor Andrew Bailey, during a recent speech to the Treasury Committee of the House of Commons, made dovish comments, stating that the UK economy is "moving towards a point where the Bank of England can start lowering interest rates." According to him, it is not necessary to wait for inflation to strictly reach the target level of 2% if forecasts confidently indicate its further decline.
It is important to note that key inflation indicators in the UK are declining. Specifically, the overall consumer price index dropped on a monthly basis to -0.5% (a multi-year low), while on an annual basis, it fell to 3.0% (the lowest growth rate since March last year). The core index decreased to 3.1% (the lowest level since September 2021), while the retail price index fell to 3.8% from the previous value of 4.2%.
All of this suggests that the GBP/USD pair retains the potential for further decline, including due to the weakening of the British currency. From a technical standpoint, the pair is situated on the daily timeframe between the middle and lower lines of the Bollinger Bands, below the Tenkan-sen and Kijun-sen lines but within the Kumo cloud. Sellers have tested the support level at 1.3360 (the lower line of the Bollinger Bands indicator on the 4-hour chart), but they have not managed to consolidate below this target. Considering short positions is sensible only if bears break this price barrier. The next target for a downward move is the 1.3300 level, which corresponds to the lower Bollinger Bands line on the daily chart.
