Pound Sterling's Tightrope: Navigating the Narrowest GBP/USD Range Since 2021

GBP/USD has had a slow start to 2024, and the Bollinger band width indicator has dropped to levels we have not seen since summer 2021. The indicator is suggesting that the trading range is excessively narrow and that we could soon see an explosive move in GBP/USD. Keep on reading to understand where GBP/USD could be heading, and its fundamental drivers.  
 

Why is Pound Sterling strong while its peers are trading lower? 

While we have seen substantial drops in the Australian and New Zealand dollar and a smaller decline in the Euro, the GBP/USD has been stuck in a 186-pip range this year. UK inflation being higher than expected, 4% annually, and services PMI being more robust is forcing the BoE to remain hawkish, explaining the GBP’s relative strength. 
 

This is in addition to its peers having its own problems. Higher than expected UK inflation, reaching 4% annually, and services PMI being more robust than anticipated, is forcing the BoE to remain hawkish and helps to explains the GBP's relative strength. But its peers are also having their own problems.  
 

In the Eurozone, annual inflation increased to 2.9%, lower than expected. German industrial production has been contracting for seven straight months. Also, the Manufacturing and Services sectors per the PMI are contracting in the Euro area.  
 

In New Zealand, inflation remains too strong to cut rates, even though the economy contracted by 0.6% annually in Q3. In Australia, annual inflation remains at a staggering 5.4% while the economy grows by 2% annually. Yet the weak Chinese economy and high tensions in the Middle East are weighing on NZD and AUD. Trump is also on track to be the Republican presidential candidate, increasing the risk that trade wars could emerge in 2025.  
 

What to expect at this week’s Bank of England rate meeting? 

Economists anticipate the BoE to follow in the footsteps of its central bank peers and remove comments in their statement suggesting that they are ready to increase interest rates. GBP/USD should also see a boost if it falls short of these expectations.  
 

There are also expectations of a dovish BoE because inflation is lower than its own forecast. Base effects from inflation are anticipated to cause UK inflation to drop to 2% this spring. However, the central bank has not been very vocal about its stance, as the likes of the ECB so it could be that the markets and economists are getting ahead of themselves.  
 

The levels that matter 

Independent of the BoE rate meeting, GBP/USD is stuck between 1.2594 and 1.2800. A break from this range is, on its own, interesting for traders. If a breakout can be linked to the BoE rate meeting, then that is better, as both fundamental and technical traders would agree, strengthening the trend. 
 

Also, the price has been trapped in its range for 46 days, suggesting that we should have a strong trend whenever we leave this range behind.   
 

The levels to watch are 1.2594 and 1.2800. If the price trades below 1.2594, it could send the price to 1.24, followed by 1.23, while a break to the upper end of the range could send the price to 1.30, followed by the summer 2023 high of 1.3139.