The GBP/USD exchange rate rose to its highest levels since April 2022, but it is now facing headwinds in the form of massive technical resistances around 1.3108 and 1.3240 levels. It might be lucky if it settles at the psychological resistance 1.30 this week, in case of any rebound higher in the price.
In general, the US dollar was sold broadly in late trading last week, which lifted the sterling pound to a 15-month high above 1.3140 while making the US dollar the worst performer in the advanced economy group of currencies for the period. This is after US inflation fell to 3% for the month of June bringing it close to the 2% average target of the US Federal Reserve.
Commenting on the currency pair trades. “The GBP/USD's strong rally was halted at the 1.3145 resistance (tested four times in the last 24 hours)," wrote Sean Osborne, Scotiabank's chief forex strategist. However, this does not appear to be a major technical point for Cable, according to my reading of the charts” and “There is little resistance - obvious - to GBP gains extending all the way to 1.33 resistance at this point. Some consolidation in this week's strong gains may be expected in the short term. Accordingly, pullbacks to the 1.29/1.30 range are likely to be strong support levels.”
- Low US inflation has boosted the supply of real or inflation-adjusted US government bonds but has done little to prevent the US dollar from falling in recent trading.
- The rise in the pound has also been encouraged by the high level of interest rate expectations from the Bank of England ( BoE).
- This was after last Tuesday's UK employment figures indicated that labor force wage growth remained at a high single digit rate for the year to the end of May in the labor market outcome which is likely to only encourage BoE concerns about the upside risks to the inflation outlook.
Forecast for the sterling / dollar pair:
“GBP/USD could rally this week and head towards the ascending resistance at 1.3328 (5-year 76.4% fibo). And “UK CPI for June will be important for UK interest rates and the pound sterling.”
The core CPI is expected to decline along with lower energy prices. However, we expect core CPI to rise further. A lift in core CPI could encourage financial markets to price in further BoE tightening and thus support GBP/USD.”
Overall, high wage growth has kept market concerns about a protracted battle to push inflation to the 2% target alive and played a role in maintaining broad bets on a BoE rate hike from 5% currently to around 6.25% by early next year. The Bank of England is likely to raise its forecast for wage growth significantly in the next set of forecasts. At the moment, there is no growth story in the UK and significant financial and political risks in the medium term are evident. The fact that GBP/USD is trading above the 1.30 psychological resistance against this background illustrates the short nature of some FX carry trades.
Overall, this could undermine the GBP/USD rate from Wednesday if a weaker-than-expected inflation figure forces financial markets to reconsider the expected peak in bank rates, but it is also likely that sterling's losses will be reversed if the recent positive trend continues in retail sales for June on Friday. However, with a group of key long-term technical resistances now hampering the path higher from around 1.3240 on the charts, GBP's upside is likely to be limited in most scenarios during what will be a quieter week for US data.
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