- The bullish momentum of the GBP/USD currency pair remains weak.
- The gloomy outlook for the future of the British economy's recovery negatively affects the pound's gains.
- Despite the recent weakness of the US dollar, the GBP/USD pair did not achieve gains except for the resistance level of 1.2210.
- It settled around the support level of 1.2120 at the time of writing the analysis.
- There may be a strong reaction to the currency market today, if the US inflation figures come with unexpected surprises for everyone.
A research publication from MUFG, the global investment bank, says it may be the peak of pessimism towards the dying pound. Sterling was the third worst performing currency in 2022, but stability in gas prices and a more stable domestic political picture are among the factors that set the scene for gains.
In this regard, Derek Halpenny, head of global market research at MUFG, says: “Our feeling as we enter 2023 is that we may have reached, or will soon reach, the peak of pessimism.” But in the near term, more losses are likely, says the analyst, as global risk sentiment could deteriorate in the first quarter of 2023, “which means that the weakness of the pound will resume.”
In general, the pound sterling maintains a high correlation with the performance of global markets and tends to rise when investors are in an optimistic mood. But any reversal in sentiment tends to send sterling lower, as was the case in the early stages of the year. Markets remain very focused on US data and speculation on how the Federal Reserve will handle interest rates over the next year.
Slowdown in US Economy
The consensus expects the Fed to end the rally cycle in the first quarter, which should boost global sentiment and the pound as business and consumers see a stabilization in the cost of borrowing. Even the forward-looking markets see the possibility of a rate cut at the end of the year as the Fed is expected to ease monetary conditions due to the marked slowdown in the US economy.
For the time being, the Fed will not want to see financial conditions unwind prematurely lest inflation gain a foothold, and so may be eager to push back the markets. The data will remain volatile and will help the Fed with its hawkish messaging. Meanwhile, a slowdown in the US and global economies raises the prospect of a disappointing series of corporate earnings seasons ahead.
This threatens market volatility and creates conditions that tend to leave the pound struggling. But looking beyond the next two months, the overarching story for 2023 is that sterling has passed its "peak pessimism". and “we have a feeling we are close to the peak of pessimism in the UK.” “Better conditions globally (lower inflation) and domestically (the end of the recession is about to come later in the year) should allow for a period of GBP outperformance,” the analyst adds.
As the new year begins, the consensus expects Britain to suffer the worst recession in the G-10 economies, depriving the British pound of an essential source of demand. Economists routinely cite high levels of inflation, weak consumer sentiment, fiscal tightening, strikes and interest rate hikes for such projections.
Weak Economic Outlook
The forex foreign exchange markets entered 2023 with a negative attitude towards the Sterling, and is confirmed by the following data which finds that the Sterling will be a unanimous sell-off in 2023. The British pound could benefit if the British economy confuses expectations, and analysts at Morgan Stanley say that the pound's outperformance is one of the ten surprises they are looking for in 2023. Overall, the MUFG expects the GBP/USD exchange rate to drop to 1.1410 by the end of the quarter. The first, to recover to 1.2180 by the end of the second quarter and extend to 1.2410 by the end of the third quarter, and surpass the psychologically important level 1.30 by the end of the year.
GBP/USD forecast today:
According to the performance on the daily timeframe chart, the attempts to rebound upwards for the GBP/USD price are weak. The bulls will not be able to control the performance without moving through the resistance level 1.2360. It returned to the vicinity of the psychological support 1.2000. I still prefer selling the Sterling Dollar from every bullish level.
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