Bulls are Looking for Stimulus

Sterling began the new week on a weak note and fell against most of its G10 counterparts, but analysts at Goldman Sachs and others say the British currency can continue to outperform. In the case of the GBP/USD pair, it tried to stabilize after selling recently, as a result of which the support level of 1.2368 was affected. It settled around the level of 1.2405 at the time of writing the analysis, and the gains of last week reached the resistance level of 1.2544.

All in all, the broad-based declines by the pound seem to be a throwback to some of last week’s dominance: It was a strong week for the British currency and included a 1.0% advance against the euro, its biggest weekly advance since February. Meanwhile, looking at pairs like GBPNZD reveals the need for a correction from overbought territory, a theme that could dominate the GBP sector this week.

“The pound is falling prey to profit-taking,” says Matthias van der Gugt, an analyst at KBC Bank, referring to the recent performance of the GBPEUR exchange rate. The currency pair has regained some of its recent gains this week, falling 0.22% on Monday to 1.16, after reaching a high of 1.1670 last Thursday.

Meanwhile, the British pound rose 0.80% against the dollar last week, a gain that would have been larger had it not been for Friday’s unexpectedly strong US jobs report that triggered a sharp bounce. The GBPUSD exchange rate fell another third of a percent to 1.24 on Monday, extending Friday’s loss of 0.60%. Commenting on this, Niksh Sujani, an economist at Lloyds Bank, said: “GBP/USD fell below 1.25, while the pound also fell against the euro, but the pair is still stable near its highest level for this year.”

Overall, the pound sterling remains one of the best performing currencies in 2023 and has been held up by expectations of a rate hike from the Bank of England, an expectation that keeps British bond yields higher than those of other major trading partners. Analysts also say that “carry-on” – the preference for currencies in which bond yields are higher – remains highly relevant to currency markets in 2023 and, accordingly, sterling is well supported.

Money markets show that investors are seeking nearly 100 basis points of tightening this year and these expectations are higher than those of the European Central Bank, allowing the pound to the euro above 1.1630. ING Bank says it expects EURGBP to drift to 0.8550, a level which is equal to the GBPEUR target of 1.17.

Economists at Goldman Sachs recently raised their forecast for the final bank rate to 5.25% in September (from 5% in August), suggesting three more hikes of 25 basis points. Economists also note that the Bank of England is facing a less difficult barter now that energy prices have fallen sharply.

• According to the performance on the daily chart below, the price of the GBP/USD currency pair is still trying to halt the pace of the recent selling operations.
• The bears will gain more control over the direction of the currency pair if it moves towards the support levels 1.2350, 1.2270, and 1.2190, respectively.
• On the other hand, there will be no control for the bulls in the direction again without the currency pair moving towards the resistance levels 1.2550 and 1.2630, respectively.
• The situation is currently neutral, awaiting anything new that supports either of the two directions.

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