GBP/USD Compression Signals Breakout as Rate Differentials Vanish

The GBP/USD has been stuck in a tight range, with its recent compression making it difficult to determine the next move. The pair is currently sitting near its 8-day exponential average, near its 21-day, near its 50-day and near its 100-day, which removes every directional signal that a moving average system can generate.

The pound has underperformed compared to other currencies, failing to capture the dollar's weakness. The dollar index fell to 99.8 at the start of August, its lowest in seven weeks, after a 1.5% weekly decline that marked its worst performance in three months.

The trigger for the risk-on shift was the collapse of oil prices due to hopes of an agreement to reopen the Strait of Hormuz. This eased inflation concerns and reduced the prospect of higher rates, which improved sentiment across risk assets and should mechanically help an energy-importing economy.