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- For four trading sessions in a row, the bulls succeeded in controlling the performance of the GBP/USD currency pair.
- Gains reached the resistance level 1.2544, before closing last week’s trading, stable around the level of 1.2450.
- The bulls await more momentum to continue breaching the bearish outlook.
- In general, the US dollar fell broadly as investors’ concern about the US debt ceiling faded and they understood the Fed’s guidance that a US rate hike in June is unlikely.
The pound-dollar exchange rate (GBPUSD) has risen steadily over the past week, but a decisive rally was recorded on Thursday as investors cut their bets on a June rate hike at the US Federal Reserve. Money market pricing showed that investors saw the potential for another rate hike in June of over 60% as of Tuesday. But it’s the middle of last week through Thursday as FOMC members indicated that the Fed is likely to adopt a new strategy of walking into “every other meeting” in order to give itself more time to evaluate the data coming in.
Thomas Florey, an analyst at UBS, has issued a long strategy recommendation on GBP/CHF targeting a move to 1.15. This recommendation is supported by strong technical indicators and strong fundamental support. The analyst highlights the attractive valuation of the pound sterling against the Swiss franc, and attributes its previous downward pressure to the political uncertainty and loose monetary policy in the United Kingdom. However, the analyst believes that the pound’s fortunes have turned, with political stability restored and the Bank of England (BoE) showing a stronger commitment to fighting inflation. The analyst notes that these positive changes have not yet been fully reflected in the pound’s assessment.
The timing of the trade coincides with the upcoming central bank meetings in the UK and Switzerland, which are scheduled for June 22. The analyst expects the trade to perform well in the lead-up to these major events. Looking at the broader picture, the market is expecting close to 100bps of interest rate hikes from the BoE over the course of the year, with the next meeting scheduled for June 22nd.
The analyst stresses the Bank of England’s determination to tackle inflation, which has proven to be more consistent compared to other G10 countries. The pound tracked British bond yields higher after the Office for National Statistics reported a headline UK consumer price index reading of 8.7% in the year to April, down from 10.1% in March, but well above the 8.3% reading the market was looking for and above the Bank’s reading expected 8.4%.
The Bank of England has already raised interest rates to 4.5% in its efforts to control inflation, but evidence presented by the Office for National Statistics on May 24 suggests that Threadneedle Street policymakers may have grossly underestimated inflationary pressures. Of particular concern is service inflation, which rose from 6.6% to 6.9%, as the bank stressed that it would closely monitor this figure as it gives clues about how local businesses and workers contribute to inflationary pressures.
According to the performance on the daily chart below, the price of the GBP/USD currency pair is in the stage of breaking the downward trend. This caused the currency pair to collapse on the threshold of the psychological support level 1.2300. The resistance levels 1.2550 and 1.2630 will be important for the bulls to start controlling direction again. The positive sentiments of investors recently, after the semi-agreement on the US debt ceiling, contributed to the gains of the sterling against the rest of the other major currencies.
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