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The US dollar is on top amid expectations of higher interest rates in the US and other major developed economies, which economists fear will lead to the kind of economic slowdown that usually favors the de facto global currency. According to recent trading, the GBP/USD exchange rate fell to the 1.2685 support level, amid a strong and widespread return of the US dollar, which led to the weekly pair dropping to 0.66%. It is also threatening to cut off three consecutive weeks of progress for the British pound. The gains of the sterling dollar last week extended to the resistance level 1.2844.
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All in all it is certain that the British pound is resisting the dollar’s gains more successfully than the majority of its G10 rivals, with only the yen making a braver effort. Commenting on the performance of currencies says Kate Jukes, Head of Forex Research at Société Générale. But make no mistake, “the dollar is back in power.”
The underwriting order for the world’s most liquid financial assets is a warning from US Treasury Secretary Janet Yellen that a slowdown in consumer spending may be the price to pay for lowering inflation. A Societe Generale analyst adds that the markets have reacted to Yellen’s comments by pricing in a bit more Fed tightening than they have before, and the two-year yield has risen above 4.75%.
The analyst added, “After larger-than-expected interest rate increases in the UK and Norway, markets are worried about rate hike surprises, and that was helping the dollar overnight, even before we saw European PMI data.”
Higher interest rates point to a deeper recession than many in the market had anticipated, creating conditions that tend to favor the dollar and the yen. According to XM.com analysts. “The Bank of England’s decision to accelerate the pace of interest rate increases on Thursday, just as many other central banks skip some meetings, appears to have raised alarm bells outside UK markets, serving as the strongest reminder yet that the fight against high inflation is a long way off.” They added, “Rising interest rates from the Swiss National Bank as well as central banks in Norway and Turkey underscored the hawkish trend, while Fed Chair Powell did not deviate from the script as he addressed lawmakers to signal two more hikes in the markets.”
Analysts point out that central banks could make another mistake by being too aggressive late in the tightening cycle despite mounting evidence that rate hikes have triggered a slowdown. This miscalculation could lead to a “financial collapse.”
The cracks in the major economies of America and Europe are becoming more apparent. Manufacturing activity in the Eurozone contracted at the fastest pace since May 2020 according to June PMI estimates and overall activity was roughly flat. And that the gloomy picture revived the attractiveness of the US dollar as a safe haven this week, which pushed its index against a basket of currencies to the highest level in more than a week. The greenback is once again enjoying a combination of safe-haven demand and a hawkish Federal Reserve, supported by a relatively stronger economy among developed nations.
- It is clear that the bulls tried to hold on to the recent gains of the sterling against the dollar, GBP/USD currently.
- Sterling strength factors are in place, which ensures the stability of the currency pair, waiting for anything new.
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