The recent weakness in the British pound has raised questions about whether the result of attitude washing is linked to the month-end rebalancing in the forex markets. In the case of the GBP/USD currency pair, it was exposed during last week's trading to a strong bearish momentum, with losses that reached the support level at 1.2591, and the decline came as a correction from strong gains for the currency pair, which reached the resistance level at 1.2848, its highest in 14 months.
The trading of this exciting and important week began, led by the Federal Reserve minutes and the US job numbers, stable around the 1.2700 level. Fund managers often adjust their portfolios at the end of the month to account for exchange rate movements, which can lead to large currency shifts.
And if this is the case, then suggestions of a more pronounced deflation in the British currency may be premature. The repositioning of technology in the past few days may be particularly evident as the new quarter and second half of the year approaches. Commenting on this, Reuters analyst Paul Spergel said that: “The recent weakness of the pound sterling may be a matter of taking a simple profit, as traders light up after the pound’s recent rally.”
Before last weekend, the pound-to-euro exchange rate rebounded by a third of a percent to 1.1650 and the pound to a dollar to 0.40% to 1.2664. The former was as low as 1.1549 in the middle of the week with the latter as high as 1.2592 on Thursday. All in all, the pound 2023 rally was crowned with multiple highs against the euro and the dollar, and continuous and multi-year against the New Zealand dollar, the Australian dollar, and the yen. The advance reflects an increase in bets for more upside among investors. And as positioning moves into the expansive territory, the risk of technical corrections could grow, adding fuel to the theory that the recent weakness in sterling is a technical phenomenon.
But there was also some fundamental news for the GBP Bulls to chew ahead of the new month as the Lloyd Business Barometer reported that UK business was at its most optimistic in 13 months in June. The business survey follows the GFK Consumer Survey which last week revealed a fifth consecutive improvement in consumer confidence.
And Lloyd's reports on labor confidence in June, rebounding after falling last month and rising in three out of the past four months. The overall confidence index increased by 9 points, the largest monthly rise since March, to reach a 13-month high of 37%. The data contrasts with growing pessimism regarding the outlook for the British economy, with a growing number of economists warning of an imminent recession as interest rates rise.
For his part, Paul Dalles, chief economist at Capital Economics, said that “Although the economy has proven to be resilient to the cost of living crisis, which is nearing its end, we believe that the cost of borrowing will send it over the edge. The drag on activity from higher interest rates is the main reason why we think real consumer spending and real private investment will decline.”
However, Lloyd reports that the improvement in the Business Barometer survey was driven by an uptick in firms' trading prospects and their optimism regarding the broader economy, which contrasts with an impending recession. Barometer also reported that employment has resumed after a decline last month and has risen in six of the past seven months. This would indicate that the UK labor market remains "tight", which should keep wages supported. Therefore, this is a frustrating development for the Bank of England which has raised interest rates to 5.0% in a bid to relax labor market tightness and bring down inflation.
Until the economic data deteriorates significantly, the Sterling may find itself supported by elevated expectations regarding the BoE's policy rate outlook, which is currently expected in the markets to rise by 6.0%. These expectations are in turn reflected in higher bond yields in Britain relative to those in economies where central banks are unlikely to cruise. International investors looking for superior yields will favor the UK's high-yield bonds - in what is known as a carry trade - creating demand for the forex markets that boost the pound.
GBP/USD Technical Outlook:
- In the near term, and according to the performance on the hourly chart, it appears that the GBP/USD is trading within a bearish channel formation.
- This indicates a short-term bearish bias in market sentiment.
- Therefore, the bulls will look to pounce on a potential rebound at around 1.2700 or higher at the 1.2760 resistance. On the other hand, bears will look to extend current declines towards 1.2661 or lower to 1.2530.
In the long run, and according to the performance on the daily chart, it appears that the GBP/USD pair has recently completed a bearish correction from the formation of an ascending channel. This indicates a significant change in market sentiment from bullish to bearish. Accordingly, the bears will target long-term profits at around 1.2495 or below at the 1.2365 support. On the other hand, bulls will look to join the recent gains at around 1.2724 or higher at 1.2844.
Ready to trade our daily Forex analysis? Check out the best forex trading company in UK worth using.