The British Pound drifts back to its floor as Crude Oil lifts the Dollar

Since September 24, the British Pound against the US Dollar has consistently bottomed within a 25 pip range of 1.3200, with Monday marking the 13th occurrence. The GBP/USD closed near 1.3210 on Monday after a brief surge that peaked just above 1.3250 shortly before London's trading session began. However, this upward movement was swiftly reversed as Brent crude oil prices surpassed $107 per barrel.

The US Dollar Index achieved its highest level since April 2025, coinciding with this Dollar strength. Consequently, Monday's decline was more attributable to the Dollar's performance than the Pound's. On Monday, Bank of England external member Mann suggested that UK inflation, currently around 4% near the year's start, could trigger a wage-price spiral.

She further indicated that services inflation would be challenging to curb without additional interest hikes. The probability of a November 5 rate increase stood at 90%, with the Bank Rate priced at 4.75% within a year, representing four quarter-point adjustments above its present 3.75% level. This equates to four hikes for an economy projected to have contracted in August.

Cleveland Fed President Hammack, voting on Fed policy this year, echoed this sentiment, favoring incremental rate hikes executed swiftly and highlighting that Treasury yields are modest by historical standards. Futures markets had already priced in an 80% chance of a December Fed hike, demonstrating a consensus for higher rates across both markets.

As the UK imports more Crude Oil and fuel than it produces, purchasing them in Dollars amplifies the impact of Brent's price movements on the GBP/USD pair. The British Pound made its highest point before the London market opened that day, with Brent near $104.50, and its lowest after Brent breached $107. Speculators maintained a net position of 97.6K futures contracts anticipating a weaker Pound over the week ending October 6, totaling approximately £6.1 billion.

Of these bets, 6.5K were added during that week. The BoE remains the only major central bank among the Fed, ECB, BoJ, and BoE that has yet to raise rates this year. Thus far, the £6.1 billion investment in a weaker Pound has secured a 13-session position at the same floor. The Pound's performance against the Euro ahead of Prime Minister Burnham's speech on EU relations contributed to the index's 18-month high, driven primarily by the Euro's decline.

The Euro accounts for 57.6% of the Dollar Index, while the Pound makes up 11.9%, resulting in the index's recent 18-month peak being largely fueled by the Euro's weakness, leading to GBP/USD's relative underperformance. Upcoming economic data releases, including the US Consumer Price Index (CPI) for September, retail sales figures, UK GDP, and RBC's September like-for-like sales, will influence Fed hike expectations and further propel the Dollar's strength in the GBP/USD pair.

On Thursday, UK's August Gross Domestic Product (GDP) and industrial/manufacturing output will be released, both forecasted to show contraction. The BoE's November policy decision appears to hinge solely on inflation considerations. The Bank's top economists, including External Member Greene, Governor Bailey, Chief Economist Pill, and Deputy Governor Breeden, will provide insights on the matter throughout the week, with the Governor's speech scheduled for Friday at an international forum.

Chancellor Healey's Budget announcement on October 28 and the BoE's meeting on November 5 will also shape future market expectations. The GBP/USD exchange rate faces resistance at 1.3250, a level previously halted bounces on October 8 and 9, and Monday's high just above it. The psychological barrier of 1.3300 has deterred bullish advances since September 24, with 1.3300 acting as the primary ceiling.

Support is anchored at 1.3200, the firm floor for the past 13 sessions, with 1.3180 marking the low of this prolonged range and the Pound's lowest point since late June. Market sentiment leans bearish as the Stochastic Relative Strength Index (Stoch RSI) deviates from oversold territory towards 45 and continues its upward trajectory, signaling potential short-term risks. A daily closing price above 1.3250 would extinguish this bearish bias.