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Next week’s inflation report is likely to be an important determinant of sterling’s outlook, although its relationship with inflation has been inconsistent in recent years, especially since the return of hyperinflation.
- The GBP/USD exchange rate corrected the reversal situation in mid-week trading after falling through a set of technical support levels on the charts but a growing set of risks and uncertainties looms and could lead to new losses in the coming days or weeks.
- The sterling currency pair against the dollar drifted towards the 1.2421 support level before settling around the 1.2488 level at the beginning of trading today Thursday.
- Its last gains were above the 1.2680 resistance level, its highest in a year.
In general, the US dollar was broadly bought on Wednesday with a few exceptions although the pound held relatively steady after being depressed near the Fibonacci level on the charts, although the Norwegian krone outperformed the Group of 10 sterling along with Australian and Canadian dollars. Commenting on the performance, Brad Bichtel, forex analyst at Jefferies, said that: “The pound continues to resist these US dollar rises more.”
“I will sell the GBP/USD pair only when it breaks and closes below the 50-day daily moving average but there is a lot of support in that area,” he added.
Meanwhile, in the Group of 20 that includes the Hong Kong dollar, the Brazilian real, Indonesian rupiah, and Russian ruble were seen on top, making gains against sterling and the dollar, although employment figures out on Tuesday pointed to uncertain expectations for sterling. Figures from the Bureau of National Statistics released on Tuesday showed a rise in the unemployment rate in April following a rise in unemployment benefit claims and a drop in the number of related employees, which surprised economists and may offset the importance of April’s increase in wage growth.
It is the wage growth part of that equation that concerns the Bank of England (BoE) the most, however, the data has uncertain implications for interest rate expectations when the inflation figure is released next week. For his part, Bank Governor Andrew Bailey said in a speech he gave on Wednesday that “The final figure of 10.1% for March was 0.8% higher than we expected.”
He added at a conference for the British Chambers of Commerce “We have, however, good reasons to expect inflation to drop sharply over the coming months, starting with the April figure that will be released on May 24.”
Most central banks generally agree that changes in labor wages can be a prominent driver of inflation because of their impact on firms’ pricing intentions, but this can be managed in the context of the inflation target, using adjustments to interest rates. The Bank of England raised its inflation forecast last week along with its economic growth forecast, which no longer envisages a recession but sees inflation following a bumpier path to the 2% target.
Next week’s inflation report is likely to be an important determinant of sterling’s outlook, although its relationship with inflation has been inconsistent in recent years, especially since the return of hyperinflation. Inflation spent most of the decade below the 2 percent target, but rose sharply and remained higher during the final phase of the pandemic and after the all-out invasion of Ukraine last year.
According to the performance on the daily chart, there is a clear break in the upward direction of the GBP/USD currency pair and the bears will increase their control over the trend if the currency pair moves toward the support levels at 1.2380 and 1.2290 respectively. In return, the bulls may have a positive wound if the currency pair returns to the resistance levels at 1.2550 and 1.2630 respectively.
The GBP/USD will be affected today by the reaction from listening to the Bank of England policy report and the results of the American data on the claims of the unemployed and the reading of the Philadelphia industrial index and the sales of existing American homes. In addition to the reaction from the policy statements of the American Federal Reserve Bank.
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