We expected that the GBP/USD price gains would remain a target for selling recently. The currency pair recovered towards the resistance level of 1.2583, from which it was subjected to profit-taking sales that pushed it towards the support level of 1.2435, before settling around the level of 1.2470 at the time of writing the analysis. The British pound could remain supported around current levels against the euro and the dollar thanks to more evidence that the British economy is proving more resilient than economists expected. UK house prices rose in April ending a multi-month streak of declines, said Nationwide, one of the UK's largest mortgage lenders.
April saw home prices rise 0.5% after seven consecutive declines, which meant the year-over-year figure was -2.7%, up from -3.1% previously. This runs counter to consensus expectations for a reading of -0.4% m/m and a further slide in the annual rate to -3.6%, suggesting a decline in the value of the UK's most valuable individual asset (housing accounts for over 60% of UK net worth) may be at its lowest levels.
After the data, the exchange rate of the pound against the euro was at 1.1375 and the price of the pound against the dollar was at 1.25, which means that the pound sterling is holding near the highest levels of the previous week. Sterling is certainly in the back seat this week as both the European Central Bank and the US Federal Reserve lead the focus of the forex market, but the findings from Nationwide will have implications for the Bank of England's rate decision on May 11.
Initial signs of a recovery in the British real estate market come despite fears prevailing in some quarters that the Bank of England's hike in interest rates will lead to a prolonged decline in real estate. Indeed, Bank of England data shows the number of mortgages approved for home purchases in February was nearly 40% below the level a year ago, and about a third below pre-pandemic levels.
Although confidence is still weak by historical standards, GfK's long-running survey shows that people believe their personal financial situation will improve over the next 12 months as will the economy. According to analysts, if inflation drops sharply in the second half of the year, as most analysts expect, this is likely to boost sentiment, especially if labor market conditions remain strong. This, in turn, is likely to support a modest recovery in housing market activity.
But some are advocating caution: Samuel Toombs, chief UK economist at Pantheon Macroeconomics, says this "may just be a glimpse of its downtrend rather than a sign of an emerging stabilization in the market".
He says other near-term polls point to weakness while mortgage rates are likely to rise over the coming months, given that risk-free rates have increased recently and spreads are already narrow by previous standards. Overall, the national data is the latest in a series of better-than-expected economic data showing that the UK economy is in better shape than most economists had expected at the start of the year. As a result, the Bank of England is widely tipped to raise interest rates again in May, with another 25 basis point hike expected after that, as it tries to decisively bring inflation under control.
This could support British bond yields, which could support the pound sterling.
However, the focus this week will be on Wednesday's US Federal Policy Update, the outcome of which is likely to send the GBP/USD above 1.25 and to new highs for the year. However, expect near-term weakness if the Fed raises interest rates by 25 basis points and rushes against current market expectations to begin cuts later in 2023.
Forecast for the pound sterling against the dollar today:
- According to the performance on the daily timeframe chart, the GBP/USD price will remain stable around and above the psychological resistance 1.2500.
- This is motivating the bulls to continue controlling performance.
- Stronger new sales for the currency pair, and the nearest support levels, if this happens, may be 1.2400 and 1.2320, respectively.
So far, the chance of going up is still there.
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