Reversing Trend for UK Economy

For three consecutive trading sessions, the GBP/USD currency pair is subject to correctional selling after its highest gains in 14 months. Gains reached the resistance level 1.2848 and a downward correction at the level of 1.2713 before settling around the level of 1.2765 at the time of writing the analysis. The Sterling awaits the announcement of numbers British inflation and the US dollar are awaiting the statements of US Central Bank Governor Jerome Powell.

The “cost of borrowing crisis” will reverse the trend for the UK economy and currency as we move through the second half of the year, according to an analysis by leading independent research provider Capital Economics. Capital Economics says that the British economy and the pound sterling are holding up better than they were, and the consensus, was expected at the beginning of the year, but the rise in interest rates in Britain and the associated decline in demand will have a sharp impact in the future.

For his part, Paul Dales, chief economist in Britain at Capital Economics, says, “Although the economy has proven its ability to withstand the cost of living crisis, which is coming to an end, we believe that the cost of borrowing crisis will push it to the brink. The drag on activity from higher interest rates is the main reason why we think real consumer spending and real private investment will decline.”

We reported these results on the day when fixed 2-year mortgage rates at some major UK lenders exceed 6.0%, which will come as a shock to the hundreds of thousands of homeowners forced to renew their mortgages over the coming weeks and months. The rise in mortgage rates and the cost of borrowing in general has been driven by a relentless rise in UK bond yields which has now seen the two-year bond yield more than 5% for the first time in 15 years.

The rise in yields comes as markets see higher interest rates as the Bank of England continues to take steps to reduce inflation in the UK. For the time being, this rise in British bond yields relative to the Eurozone, the US and elsewhere is proving supportive of Sterling, which is the best-performing currency in 2023 as we reach the middle of the year.

The pound-to-euro exchange rate rose to its highest level since August 2022 on Monday at 1.1738 as UK short-term yields extended an upward rally. Meanwhile, the pound-dollar exchange rate reached its strongest level in more than a year at 1.2848 last Friday. But for Capital Economics analyst Jonas Goltermann, the supportive dynamic between rising yields and the value of the pound could change if the British economy slips into recession over the coming weeks.

The analyst added, “We doubt the strength of the pound will continue, and we continue to believe that the economic downturn in the United Kingdom and other developed economies will lead to renewed downward pressure on the pound later this year.”

Money market pricing right now shows that investors are positioned to make a peak in the bank rate of around 6.0%. But Capital Economics says the bank rate will not rise, suggesting a rise from the current 4.75% to 5.25%. However, this will still be enough to make you slack. Capital Economics expects the GBP exchange rate to be at 1.21 by the end of September, declining to 1.15 by the end of the year, and recovering to 1.18 by the end of March 2024 and 1.20 by the end of June 2024.

• According to the performance on the daily chart below, the general trend of the GBP/USD pair is still bullish.
• Moving around and above the psychological resistance 1.2800 will remain supportive for more bulls controlling the trend.
• Moving towards the psychological resistance level 1.3000 may be easy if it moves the currency pair is targeting the resistance levels at 1.2885 and 1.2930, respectively.

On the other hand the GBP/USD pair broke the support level at 1.2660, important to start a first break of the current bullish trend. Today, the currency pair will be greatly affected by the announcement of the British inflation figures and the reaction from the testimony of US Federal Reserve Governor Jerome Powell.

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