For four trading sessions in a row, the GBP/USD currency pair is exposed to selling operations with losses extending to the support level of 1.2284. It settled around the 1.2320 level at the time of writing the analysis while waiting for the reaction of the markets and investors to the monetary policy decisions of both the Federal Reserve Bank of America today and the Bank of England tomorrow Thursday. The former expects only a quarter point increase, and the latter expects a half point increase. The tone of their monetary policy statements will have a strong reaction to the performance of the currency pair.
The Bank of England is widely expected to raise interest rates by 50 basis points on Thursday, but analysts at one international investment bank say the increase will be smaller, and the result will be a weakening of sterling.
For its part, the Bank of England raised interest rates during 2022 and the pound traded lower following the majority of decisions, which confirms the trend that may extend until 2023. The weakness of the sterling was due to either, 1) the bank raised interest rates to a smaller extent than the consensus expected , or 2) that it met expectations regarding the size of the increase but provided pessimistic guidance and weak economic forecasts.
The International Commercial Bank expects that the bank will want to slow down to consider the effect of the previous increases on the mortgages, especially since a large amount of the fixed rate mortgages will soon be due for renewal. The analyst added by saying “In addition, there is a very good chance that the bank will revise its long-term inflation expectations lower.”
According to market transactions
GBP/EUR has started the new week trading under pressure at 1.1370 and the Bank of England decision and guidance will clash with that of the European Central Bank, which is also expected to deliver a 50 basis point hike on Thursday. Meanwhile, the pound-to-dollar exchange rate GBPUSD is conflicting with the Federal Reserve’s decision tonight, with a 25 basis point lower hike expected.
Therefore, the future view of the pound will depend this week on the decisions of at least three central banks.
For sterling, the three risks are delivering as expected on the interest rate front, but the Bank of England is distancing itself with more pessimistic guidance on the outlook. The bank is likely to raise its economic forecast for 2022 but after that, the economic outlook is likely to remain bleak.
What happens to inflation expectations is a particular concern
Jeremy Stretch, forex currency analyst at CIBC says, “We will look at the possibility of an avalanche of real economy data and a possible delay in the consumer price index, starting from the second quarter of 2024 onwards, where it is likely to maintain a strong crack in policy through the Monetary Policy Committee.” And CIBC expects another three-way split in the bank’s monetary policy committee vote, culminating in an increase of 25 basis points instead of the 50 basis points that analysts and the market had discounted.
Today’s sterling vs. dollar expectations:
- According to the trades on the chart for today’s time frame, the last selling operations did not amount to turning the general direction of the sterling pair against the US dollar GBP/USD into a bearish one.
- This will not happen without moving towards the support levels 1.2210 and 1.2120 respectively and the last level is important to expect the psychological support 1.2000 as an important stage for the transformation.
- On the other hand, if the dollar declines and the sterling receives a wound from the Bank of England’s signals, the bulls may find a strong opportunity to return to the vicinity of the 1.2410 and 1.2530 resistance levels, respectively.
I still prefer to sell the sterling/dollar from any rising level, as the outlook for the British economy is bleak, whatever the Bank of England’s decisions
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