GBP/USD fell late last week after testing a major technical resistance just above 1.2850 on the charts. More corrective losses could lead to a return or even below the 1.26 support if the outlook for economic risks in the UK sterling was undermined and the dollar extended its rebound broadly.
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Overall, the British pound remained one of the top performing major currencies in the month and year, but was almost an underperformer last week after Thursday’s larger-than-usual BoE rate hike followed by selling near and around its best level against the dollar. Since April 2022 the Bank of England overdelivered many economists’ expectations when raising the bank rate from 4.5% to 5% and warned of the possibility of further increases, but Sterling’s earlier rally above the 1.28 resistance was cut short to close near the round number 1.27 on Friday.
For his part, says Samuel Tombs, chief economist for Britain at Pantheon Macroeconomics: “The committee was not clear on how much progress it needed to see before taking a break, and it is clear that it tends to do too much rather than too little.” He added, “As is the case now, we believe that the Monetary Policy Committee will raise the bank interest rate to 5.25% in August and to 5.50% in September.”
Sterling also did not benefit much when the Office for National Statistics said on Friday that UK retail sales rose more in May rather than fall according to consensus, while Sterling remained subdued against the dollar after S&P Global said manufacturing and services slowed significantly in June.
The Bank of England’s decision came on the heels of a disastrous set of inflation figures, with the headline inflation rate halting at 8.7% after a steady decline from 11.1% in September 2022, and the core rate rising again for the second consecutive month in another sign of picking up domestic inflation. problem for policy makers. Andrew Goodwin, chief UK economist at Oxford Economics, says: “In terms of how high rates will be, the MPC will see one more labor market and inflation release before its next meeting in August. With these factors unlikely to be game-changers, we expect another 50 basis point rally at that meeting,” he said. And we’re in the process of raising another 25 basis points at that meeting. This means that the bank’s interest rate will peak at 5.75%, which is about 25 basis points lower than what markets are currently expecting.”
It is not clear whether sterling’s losses resulted from investor disappointment with the size of the Bank of England’s interest rate move – it is possible – or market concerns about the outlook for the British economy in the face of what is already the third most significant “tightening” cycle since the creation of the Bank of England in 1694. The potential problem is that pre-inflationary declines in Britain were caused solely by changes in the prices of imported things while implicit measures in the market now suggest that the bank rate should be raised to 6.25% by the end of the year, which would only leave 1978 to the year – The 1979 tug cycle to exceed the current one in size.
This suggests there are significant risks ahead for the economy and GBP on the way forward, but with the calendar lacking in major economic data appointments this week, the highlight of GBP/USD is likely to be the policy committee discussion. On Wednesday at the European Central Bank’s Forum on Central Banks. Which includes Governor of the Bank of England Andrew Bailey.
- There is no change in my technical view of the performance of the price of the GBP/USD currency pair, only the performance on the daily chart below.
- There is hope for the rise of the currency pair, which is still gaining strong momentum, from the resistance level of 1.2800, which is currently closest to it.
- The strength factors of the sterling are in place, which ensures the stability of the currency pair, waiting for anything new.
It must be taken into account that the increase in US inflation rates today may support the tightening of the US Federal Reserve’s policy, which will be negative for the performance of the currency pair.
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