- At the beginning of trading, the exchange rate of the GBP/USD currency pair was moving in a narrow range with its downward slope between the 1.2460 support level.
- This is its lowest in three months, as it then settled around the 1.2512 level at the beginning of today's session, Tuesday.
- This occured before the first important British economic releases.
Analysts say that the GBP/USD exchange rate is at risk of further losses in the short term, and even the positive labor market report in the United Kingdom today Tuesday will probably not be enough to resist the broader dollar trend. The GBP/USD exchange rate has fallen below 1.25 in the previous week and analysts point out that this highlights a deterioration in the technical setup that leaves the charts calling for further losses in the near term.
George Facey, the analyst at Confera, says "a test of the USD 1.25 level for the GBP/USD pair was brewing, and the main psychological level had already collapsed. The 200-day support, located at $1.2425, may be the next target in the short term as questions about the path of interest rates in Britain weigh on the pound sterling.
The pound sterling was the worst performer among the major currencies in the midweek session last week after some blunt statements from Bank of England Governor Andrew Bailey that a rate hike in the UK was imminent. This recognition prompted markets to lower expectations for a rate hike in November, while increasing the odds of leaving rates unchanged in September.
According to recent trades, GBP/USD fell last week to a new three-month low of 1.2454 after investors were left with very few attractive alternatives to the dollar following disappointing economic data in China and the Eurozone.
The disappointing data in Europe, the United Kingdom and China contrasts with a series of better-than-expected US data that raises expectations that the US Federal Reserve is capable of keeping interest rates at current levels for an extended period. At the same time, analysts expect the rise in oil prices to be supportive of the US dollar, as the non-oil exporting countries are expected to witness high inflation rates as growth continues to slow.
However, the US is unlikely to experience such inflationary conditions as growth continues to exceed expectations compared to China and Europe.
Wells Fargo - one of the major American banks - said in its latest monthly research note, that the US dollar could show greater strength until the end of 2023 than previously expected. In this regard, Nick Benenbrook, the economist at Wells Fargo, says: "Our view on the US dollar has changed slightly. And we now believe that the dollar could show greater strength until the end of 2023 than previously expected, as China's slowdown and the resilient American economy could support the American currency."
The GBP/USD trade is likely to see some volatility on Tuesday when the Office for National Statistics releases the latest UK jobs and wages figures. The market expects average wages + bonuses to reach 8.2%, a figure ultimately consistent with high inflation levels in the UK that the Bank of England would like to see lower. The bank indicated last week that it was about to end its rate hike cycle, a message that would gain some credence if headline wage numbers came in below expectations.
Overall, the pound sterling fell following Bank of England Governor Andrew Bailey's message to UK lawmakers last Wednesday. The message was that the peak in interest rates was close because the bank expected inflation to fall sharply over the coming months. Hence the pound is likely to fall again if the data supports his message. A report from Oxford Economics last week warned that their detailed models indicated an upside surprise in the data, which would put us on alert for a potential bounce in sterling on any strong readings. However, the REC report released on Friday revealed that the UK labor market was easing as employer demand for staff fell at the fastest rate since 2020 in August. At the same time, the number of job seekers increased, which led to lower wage offers.
The market consensus also expects the National Statistics Office to announce a rise in the country's unemployment rate to 4.3% in July from 4.2% in June.
All eyes in the United States of America this week are on the release of the American inflation data for the month of August on Wednesday at 13:30 GMT. The core CPI is expected to rise 0.2% in the month through August, and the headline figure is expected to reach 0.5% on a monthly basis. If these numbers exceed expectations, it is likely that the US dollar will find more support with the interest rate in the markets remaining at a high level for a longer time.
Thursday will see the release of inflation figures in the producer price index, and the headline is expected to come at 0.4% per month for the month of August. For inflation, ING is looking for fairly large jumps in headline readings for August with upside risk compared to consensus expectations. US retail sales are scheduled for release on Thursday at 1:30 PM GMT and the market is expecting a reading of 0.2% growth,
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