- With the start of this week’s trading and amid a temporary halt in the dollar’sgains, the GBP/USD pair succeeded in moving higher, amid caution, to the level of 1.1436.
- It recovered from the 1.1350 support level, its lowest since 1985.
- Despite the performance, the US dollar is still the strongest with expectations of raising US interest rates.
There is no doubt that this week is very important and fateful for the GBP/USD pair. Although it has fallen to its lowest levels against the US dollar since 1985, sterling is still not cheap, indicating the potential for further losses, according to new research. RBC Capital Markets says its measures of the "real" value of the pound suggest it's still near the top of the 30-year range and notes the bottom.
The GBP/USD exchange rate fell on Friday to 1.1351, its lowest level since 1985. It is poignant that the decline comes on the 30th anniversary of Black Wednesday when the British pound withdrew from the European Exchange Rate Mechanism in 1992.
The US Federal Reserve and the Bank of England are expected this week and investors are betting on rate hikes sharply again to chase steep inflation. The two central banks are expected to consider recession fears and continue their battle against historic price hikes. Although inflation fell to 8.3 percent, analysts warned that price pressures are starting to take hold in the US economy, which could force Federal Reserve Chairman Jerome Powell and the rest of the rate-setting committee to raise borrowing costs 75 basis points for the third time.
Experts at the Wall Street investment bank Goldman Sachs support such a move by the Federal Reserve, which raised US interest rates to 2.75 percent and three percent. However, the world's most powerful central bank is not going to stop there.
“We anticipate a 50-basis rise in November and December, bringing the funds rate to 4-4.25 percent at the end of the year,” they said in a note to clients over the weekend.
Figures published last week revealed that core US inflation is still standing, reaching 6.3 percent last month, above Wall Street expectations. Analysts worry that inflation, which until recently was driven by international factors the Fed could not influence, is being fueled by high wage growth and that domestic service firms are passing higher costs to consumers through higher prices until recently.
Similar dynamics are taking place in the UK. Inflation there has fallen from a 40-year high of 10.1 percent to 9.9 percent in August. However, core inflation also surprised the upside, while the rate of service price hikes reached a 30-year high. Markets expect Bank of England Governor Andrew Bailey and colleagues to raise borrowing costs by 50 basis points to 2.25 percent. However, they are betting on an external opportunity for a 75-basis point move, which would be the largest in 25 years of monetary independence.
Sanjay Raja, the chief economist at Deutsche Bank, said that taking a sharper step would halt the pound's decline against the US dollar and offset the inflationary pressure driven by the government's cost-of-living support package, "to strengthen [the bank's anti-inflation credibility".
GBP/USD Forecast
The general trend of the GBP/USD currency pair is still bearish and may remain until the reaction from the monetary policy announcements of both the Federal Reserve and the Bank of England. This is especially true about the latter because of the pessimism that negatively affected the sterling and made it fall to the lowest in 40 years due to the delay of the Bank of England in rapid and aggressive response as the Federal Reserve does.
Stability below the 1.1400 support aids the bears' control, and at the same time pushes the technical indicators towards sharp oversold levels. Investors may think a lot about buying from levels below the 1.1350 support.
On the other hand, according to the performance on the daily chart, breaking the 1.2000 resistance will be important to change the current trend.
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