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GBP/USD ticks higher, but the dollar's ultimately still in charge.
The pound to dollar exchange rate (GBP/USD) tested the air above 1.31 after the Bank of England's November interest rate decision, but the advance still looks tentative and entirely dependent on what the dollar does next.
Sterling found some genuine idiosyncratic support after the Bank kept interest rates at 4.0% and gave a strong signal that it will lower them next month, before making a potential final cut in early 2026.
Having dipped on the initial decision, sterling soon found its feet, pulling GBP/USD briefly through 1.31, having tested a seven-month low at 1.30 earlier in the week.
The messaging from the Bank was clear in that it thought inflation had peaked and would steadily fall from here, allowing it to lower rates a little further.
Markets had been steadily building up to this outcome over the course of the past three weeks, meaning there were no GBP-negative surprises in the pudding.
But, the ability of GBP/USD to turn the tables and return higher will likely depend on what the dollar does next, given this is the dominant force in the exchange rate.
"The GBP is starting to look cheap more structurally at the 1.30 mark but will need a turn in the USD sentiment beyond the budget event risk to start strengthening again. The catalyst for that could be a resumption of the shutdown and more clarity on December FOMC cut," says Jayati Bharadwaj, Head of FX Strategy at TD Securities.
Paul Spirgel, market analyst at Reuters, says bullish momentum appears to be regaining traction in the short-term charts.
"Yet, to fully neutralise the prevailing bearish sentiment, a breakout above the falling 10-day moving average at 1.3174 is needed. As traders unwind recent short positions, the pair may be anchored just above current levels in the near term," he adds.
UBS says that what's needed to push the dollar lower is weak U.S. economic data, but, that's missing, thanks to the long-running government shutdown.
Amidst the dearth of official U.S. data, UBS says it's left to corporate earnings to deliver a verdict on the state of the U.S. economy.
"And the news flow on that front remains largely supportive," says Alvise Marino, foreign exchange analyst at UBS.
U.S. earnings are beating estimates by 7.8% in aggregate and 78% of companies outperforming projections.
"The path of least resistance seems tilted towards further modest USD upside for now," says Marino.
Until the dollar's multi-week trend of appreciation fails, the pound-dollar remains at risk of a test of 1.30 and below.