- The pound-dollar exchange rate (GBPUSD) reached a new one-year high of 1.2668 at the beginning of this week's trading.
- New technical analysis reveals that it appears to be stretched ahead of the release of major US inflation and the Bank of England's decision on Thursday.
- The GBP/USD price is settling around 1.2620 at the time of writing.
Commenting on the performance of the currency pair. “GBP/USD is worth a closer look after the recent price action,” says Bill McNamara, Head of The Technical Trader. The British currency closed higher last week against the dollar, which means that it has advanced in seven of the past eight weeks.
By trade, the GBP/USD pair rose to 1.2668 on Monday as the entrenched bullish trend extended to levels last seen almost a year ago. The gains come after last week's US interest rate hike and guidance that gave investors confidence that further increases are unlikely again in 2023 as they seek to cut interest rates by about 70 basis points by the end of the year.
Meanwhile, the UK's inflationary picture suggests the Bank of England still has more to do with another 25 basis point increase due Thursday, with market prices showing that investors expect at least two more increases before the end of the year. However, the rise takes the pound against the dollar to a significant resistance area that may mean that the pair faces a near-term setback in the coming week.
The chart shows that the British pound is close to a full recovery of 61.8% from the decline that started in June 2021, that is, at $ 1.28 or so, and the fact that it now appears to be greatly extended means that there may be a degree of resistance at that level, and the first test of the exchange rate comes in the middle of the week with the release of US inflation figures.
Charalampos Pissouros, chief investment analyst at XM.com, says investors are reluctant to take large positions ahead of Wednesday's US CPI inflation figures. Whereas, the core inflation rate is expected to hold steady at 5.0% yoy and core inflation to ease to 5.5% yoy from 5.6%. However, XM.com analyst says Fed cut bets are unlikely to fade, ensuring that the dollar's strength will eventually remain limited.
According to BDSwiss analysts: “As long as the European Central Bank and Bank of England are expected to offer further hikes this year without any cuts at all, the dollar could remain bearish against both the euro and the pound sterling. The greenback's gains may be limited if monetary policy trends are not in their favor in the long run. It is expected that both the European Central Bank and the Bank of England will continue to raise interest rates over the next few months while the Federal Reserve can pause and possibly reduce rates.”
Markets are expecting another 60 basis points of hikes from the BoE before the end of the year with the ECB only expected to deliver more. This has supported sterling so far but also leaves it at risk of decline if the Bank of England reverses these expectations on Thursday.
The bank had shape in this area, warning throughout 2022 that it expects a deep recession in 2023, and therefore rates will not need to rise as high as the market expects. This means that in recent months the pound has tended to decline in the wake of the “doubtful” assessments from the Bank of England.
Sterling forecast against the dollar today:
There is no change in my technical point of view, as the general trend of the GBP/USD pair is still bullish. Stability is above the 1.2600 resistance, which confirms the bulls' control over the trend. Technical indicators are heading towards strong overbought areas, with the bulls returning in the currency pair towards the resistance levels at 1.2670, 1.2730, and 1.2800, respectively. In the event that the US inflation figures today come in favor of tightening the US Federal Reserve's policy, the currency pair may be exposed to profit-taking sales that may reach the support levels 1.2550, 1.2480, and 1.2400, respectively.
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