At the end of last week's trading, the exchange rate of the pound against the dollar (GBPUSD) rose to the resistance level of 1.2848, the highest for the currency pair in more than 14 months. It settled around the resistance level of 1.2825 at the beginning of this week's trading. The US central bank abandoned the path of raising US interest, even if temporarily, allowing the bulls to move the currency pair with confidence. The mixed results of recent US economic data failed to convince the markets that the Federal Reserve was certain to raise US interest rates in July.
Sterling's gains against the rest of the other major currencies are on an important date this week, with the announcement of the Bank of England's policy update. In this regard, economists at Bank of America expect the Bank of England to raise three more increases of 25 basis points to raise the interest rate to 5.25%. “We also have more clarity about the post-Brexit order, better relations with the EU, and a significant reduction of related risks,” the analysis adds. According to the bank, GBP/USD is now expected by Bank of America to end 2023 at 1.24 and to rise steadily to 1.35 through 2024.
Last week, the Federal Reserve left US interest rates unchanged in response to persistent evidence that US inflation is declining, but indicated that it is likely to raise interest rates again. In this regard, Chris Beauchamp, senior market analyst at IG, says: “The dollar bulls witnessed a reversal of their gains, as the dollar reversed its gains last night. The Fed may be keen to point out that it is not pausing, but the market clearly thinks otherwise.”
However, US inflation remains somewhat above the Fed's target, and the Fed issued guidance indicating that it believed two more rate hikes were appropriate by the end of the year. Markets seem reluctant to internalize this message, however, by selling dollars and buying stocks, suggesting that investors think the Fed has ended its cycle.
The US labor market is particularly important in this regard: once unemployment starts to rise, wage pressures will begin to ease, ensuring that demand in the economy subsides and inflationary pressures recede. Last week, US jobless claims jumped unexpectedly to 261K from 233K, defying the market that was looking for a rebound to 245K. A reading above consensus for this week at 246.75K constitutes a second consecutive negative surprise convincing investors that the labor market may turn around.
Last week, Bank of America raised its outlook for the British pound, saying that the British currency would remain supported despite a "bleak fundamental outlook" for the British economy. Bank of America is certainly among the list of investment banks that have long been bears on sterling, forecasting chronic underperformance in the economy as the British economy falters for growth in 2023. But the economy outperformed consensus expectations, leading to a series of Surprises in the data that led to British bond yields snubbing and the pound rising.
Sterling forecast against the dollar today:
- According to the performance on the daily chart below, the bullish trend of the GBP/USD pair is getting stronger.
- The bulls may have the opportunity to move towards the psychological resistance level 1.3000 if the bulls settle in prices above the resistance 1.2850.
- The positive momentum for the pound increased before the Bank of England rate hike at a later time
This week widens the gap between the US Federal Reserve's policy, which kept the US interest recently, and the Bank of England, which adopts a policy of continuous tightening. On the other hand, and for the same period of time, the bears will not control the trend again without returning to the support level 1.2545 again. The currency pair may remain in its path today in light of the American holiday and until the reaction to the policy of the Bank of England.
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