- Gains for GBP will be subject to a quick sale as the gloomy expectations for the future recovery of the British economy during the year 2023 are still negatively affecting any positive outlook.
- This is on part of the Bank of England to raise interest rates to the greatest extent than the American central bank decided recently.
- Last week’s trades were a good proof of what we expected, as the currency pair sterling against the US dollar GBP/USD fell to the support level of 1.2050. The highest price of the currency pair last week was the resistance level of 1.2417. The currency pair is in the process of breaking the important support level of 1.2000, which is an important level to change the direction to the downside.
The pound sterling came under a lot of pressure against the euro and the dollar before last weekend after the release of surprisingly strong US data. The jobs and survey data for January showed that the US economy is in surprisingly strong shape, despite a series of activity-limiting interest rate hikes from the US Federal Reserve. In fact, the better-than-expected increase in jobs during January – 517,000 were created according to the nonfarm payrolls report – suggests the Fed will need to do more on rates if it wants to tame inflation. The US jobs report defied expectations for an increase of 185,000 jobs and rose sharply from 260,000 in December.
Stock markets fell as investors fear that interest rates may need to rise higher than they had expected, strengthening the dollar and increasing pressure on the pound. The pound sterling is a “high beta” currency that tends to underperform the dollar and euro when markets decline, as it did on February 3rd.
The American jobs report revealed that the unemployment rate in the United States fell to 3.4% from 3.5%, defying expectations that unemployment would rise to 3.6%. The hourly average rose 0.3% in January, meeting expectations, and the December figure was revised upward to 0.4%. Wages fell year-on-year to 4.4% from 4.8%, but that was still stronger than the 4.3% the market had expected. Consequently, the labor market is “tight”, and companies are expected to offer strong salary packages to retain and attract talent. This in turn supports domestically generated inflation and conflicts with the Fed’s goal of reducing inflation. Therefore, the bet is that more increases must come and that the interest rate cut by at least the third quarter – as the market expected – will not materialize.
This leads to higher US bond yields and attracting capital to US assets, thus strengthening the dollar. The pro-US dollar theme was underscored by economic survey data from the ISM that showed the US service sector rebounded sharply in January. The ISM non-manufacturing PMI came in at 55.2, ahead of expectations at 50.4, rebounding from 49.2 in December, a level consistent with a contraction. If markets melt more in fear of higher federal interest rates, the dollar may make more gains. Meanwhile, the pound sterling is expected to come under further pressure.
Technical analysis of the sterling/dollar pair:
In the near term and according to the performance on the chart for the hourly time frame, it seems that the GBP / USD currency pair is trading within the formation of a descending channel. This indicates a significant short-term downward blow in market sentiment. Therefore, the speculators on the decline – the bears – will look to extend the current series of declines towards 1.1983 or below to the 1.1915 support. On the other hand, the bulls will look for a rebound at around 1.2133 or higher at the 1.2195 resistance.
In the longer term and according to the performance on the daily chart, it seems that the GBP/USD currency pair has recently completed a downward breakout from the formation of an ascending channel. This indicates a major change in market sentiment from an upward trend to a downward trend. Therefore, the bearish speculators will target the long-term profits at around 1.1860 or below at the 1.1699 support. On the other hand, the bulls will look to pounce on profits around the 1.2257 resistance or higher at the 1.2428 resistance.
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