The GBP/USD exchange rate reached its highest level since April last year in the last session of the week, with an earlier rise approaching its ninth week. The risks arising from the interest rate decision issued by the Bank of England next Thursday are likely to be all over the negative side. During last week’s trading, the GBP/USD jumped to the 1.2652 resistance level, its highest in a year, and closed trading around 1.2630, confirming the bulls’ control.
Sterling’s gains were not only against the dollar, while it rose against most other countries in the G20 basket, with a few exceptions such as the Norwegian krone, Swedish krona, Mexican pesos, Russian ruble, Canadian dollar, and Australian dollar.
The gains were made amid a rise in risky assets led by troubled US bank stocks, which came strongly on the heels of another massive US non-farm payrolls report and amid speculation that an agreement to temporarily raise the US debt ceiling is near. However, Friday’s price action leaves the pound at risk of losses this week when the Bank of England prepares to release an updated outlook for the UK economy along with what economists and financial markets expect will be another rate hike.
Commenting on performance and influence factors. “UK activity data has surprised to the upside in recent weeks and our economists now expect the Bank rate to peak at 5%,” Sharon Bell, senior analyst at Goldman Sachs, said in a research briefing on Friday. “Better growth and higher rate expectations led to a rally in sterling which would normally boost UK domestic equities, but their reaction was contained this time around as EPS estimates remained relatively weak,” she adds.
The BoE raised the bank rate to 4.25% in late March while it hinges on future policy decisions on inflation and other economic outcomes in the coming months, but the problem the BoE and the economy have is that a lot of the recent data coming out of Britain has led financial markets to expect other interest rate increases. Notably, inflation only fell as much as 10.1% in March when it was expected to fall back into the single digits while retail sales, once adjusted for inflation, posted their first quarterly increase since the summer of 2021 and the overall economy was picking up. It seems to revive in the first months of the new year.
When wage and salary growth that continues to rise is coupled with high single digits, the Bank of England may feel compelled to raise the bank rate further on Thursday and will have no choice but to upgrade its outlook for the economy. In this regard, Andrew Goodwin, chief economist for Britain at Oxford Economics, wrote in a research briefing on Friday: “If there was any doubt that the Monetary Policy Committee would raise the bank rate at next week’s meeting, this week’s UK data dispelled that.” quickly”.
“Further evidence of strengthening activity – particularly in the consumer-facing sectors – and continued inflation means that the MPC’s criteria for raising interest rates have been unequivocally met,” he adds.
The analyst cites S&P Global’s recent upward revision of estimates for activity in the manufacturing and services sectors in April as a potential additional catalyst for another bank rate hike this week, but they warned the Bank of England could follow in the Fed’s footsteps by reducing its “tightening bias”. This would undermine the market’s implicit expectation of a 5% interest rate hike in the coming months while counting as a bearish consequence for the GBP but Sterling could also stumble this week if the BoE shows a tendency to indulge in market expectations because of the risks it may store for the economy.
The British economy has shown resilience in recent months, but that doesn’t mean it hasn’t slowed down or that the Bank of England’s infamous forecast of a five-quarter recession has yet to materialize because the effects of an already large increase in the bank rate are working well. All in all, the bank rate was raised from 0.1% to 4.25% between December 2021 and March this year, doubling the cost of owning a home over the life of a 25-year mortgage for those who fixed borrowing costs at any point in recent years, and there is no more meaningful form of mortgage interest relief for ordinary families.
- According to the performance on the daily chart below, the general trend of the GBP/USD pair is still bullish.
- Its gains are above the resistance 1.2600, confirming this.
- It is pushing the technical indicators towards strong overbought levels.
In the event that the pound sterling did not get a positive momentum from the Bank of England this week, the currency pair may be exposed to strong profit-taking sales, bearing in mind that the US inflation figures will also have a strong impact on the currency pair.
Currently, the bulls’ closest targets are the resistance levels 1.2670, 1.2720, and 1.2800, respectively. In the event that the expected selling operations occur, the support levels 1.2510 and 1.2400 may be the most important ones to start turning the currency pair’s outlook into a bearish one.
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