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Current money market pricing shows that investors are looking to start cutting interest rates in the second half of 2023 as the Fed reacts to a sharp slowdown in the economy.
- Despite the US dollar’s recent decline, the GBP/USD rebound did not exceed the resistance level of 1.2506, including the currency pair’s strong selling operations that pushed it toward the support level of 1.2386.
- This happened before settling around the 1.2400 level at the beginning of Wednesday’s session.
- Forex investors are wondering about the reasons for the weakness of sterling’s recent gains.
There are “three reasons not to sell the dollar” according to a new analysis from Credit Agricole indicating that a peak has been reached in GBP/USD near the 1.25 resistance, for the time being at least. The France-based global investment bank says that despite the weakness of the US dollar, it is unlikely to slip into a long-term downtrend that would push the GBP/USD exchange rate to new highs.
“The first is a less pessimistic-than-expected pivot policy from the Fed next week when we expect the bank to rise for the last time in the current tightening cycle, but also resist pricing in rate cuts,” says Valentin Marinov, who heads forex research at Credit Agricole.
“The market expects the Fed to raise US interest rates by another 25 basis points on May 3, but the messages may indicate that this is the latest hike. However, the Fed will be keen to convince the markets that it would be too early to cut interest rates, which could provide some support for the dollar,” he added.
Current money market pricing shows that investors are looking to start cutting interest rates in the second half of 2023 as the Fed reacts to a sharp slowdown in the economy. In fact, the US Federal Reserve is expected to cut more than any other major central bank in 2023, a development that sent the dollar lower and helped GBP/USD post a 3.0% advance for 2023.
However, Credit Agricole expects incoming US data to confirm that inflation remains uncomfortably “flat”, ensuring that the US Federal Reserve “keeps interest rates high for a longer period and weighs on risk sentiment, boosting the dollar as a safe haven.”
The final potential source of dollar support will be the perpetual question of which the US debt ceiling should be raised again.
All in all, Credit Agricole joins other institutions in expecting it to increasingly dominate forex market price action and could give the US dollar an additional boost against risk-correlated currencies.
The US Treasury reached its debt limit on January 19, 2023, leaving it dependent on incoming tax receipts and other extraordinary measures to stay funded, although some analysts estimate those resources will run out sometime in June without action from the government. Congress and the White House. The US Treasury states that “failure to increase the debt limit will have catastrophic economic consequences. This will result in the government defaulting on its legal obligations — an unprecedented event in American history.”
According to the performance on the daily chart below, there is a clear attempt to break the general trend of the GBP/USD currency pair. The bears may succeed in controlling if the currency pair continues to decline toward the support levels of 1.2345 and 1.2270, respectively. On the other hand, over the same time period, the bulls’ move above the resistance of 1.2555 will be important, as they gain strong momentum to move strongly upward. In general, I still prefer to sell the currency pair from every bullish level.
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