During the trades of the exciting past week the price of the pound sterling against the US dollar GBP/USD dropped strongly due to bets that the Bank of England will follow the lead of the European Central Bank in ending the tightening cycle. GBP/USD's losses on those expectations pushed past the 1.2378 support level, its lowest in three months. In general, the dollar was the ultimate winner of the European Central Bank's cautious policy announcement last Thursday, which led to losses in the exchange rate of the pound against the dollar.
As the European Central Bank's decision to raise interest rates, but hinting at a long pause, has prompted investors to raise bets, and there is likely to be a similar outcome from the Bank of England this week. Commenting on that, Francesco Bissol, forex analyst at ING Bank, says: "The rise of the cautious European Central Bank and another round of strong US activity data pushed the dollar to another rise."
The European Central Bank also said that interest rates have reached levels "if they are maintained long enough, they will contribute significantly to the timely return of inflation to the target".
Even for the average person, this suggests that there are no further increases imminent in the near term, which has led to lower eurozone bond yields and the euro price. And according to some analysts, "we were expecting a hard stop, but what we got from the European Central Bank at the meeting of the Central Bank's Board of Governors was like raising interest rates." After raising key interest rates by 25 basis points, the European Central Bank now feels that interest rates are at an appropriate level."
Developments in the bond and foreign exchange markets reflect market expectations for an interest rate cut by the European Central Bank earlier than 2024. At the same time, another interest rate hike by the US Federal Reserve cannot be completely ruled out (although it not our baseline) and markets have been forced to reprice expectations of a recent Federal Reserve rate cut significantly on the back of resilient US economic data.
These developments in the relative expectations of monetary policy help in explaining the losses of the euro against the dollar, but what about the pound sterling?
First, the broader dollar rally was always likely to affect sterling and other US dollar pairs, albeit to a lesser extent than the euro against the dollar itself. But, as mentioned earlier, the market sees an increasing risk that the Bank of England will follow the lead of the European Central Bank and raise interest rates again next Thursday while pointing to a peak.
The governor of the Bank of England, Andrew Bailey, said that the bank is getting close to raising the final interest rate. Accordingly, sterling fell in response to Bailey's comments to British lawmakers in Parliament, but another downward correction is likely if those comments are published when new guidance is issued on September 21. The British central bank raised interest rates to 5.25%, but given the high level of inflation, it is likely to be raised again. But data released this week revealed that unemployment in the UK is on an upward trajectory and that wage pressures will soon begin to ease, easing inflationary pressures.
The bank will feel that the job is done, but for the pound sterling, this could also mean more losses to come.
Today's sterling vs. dollar expectations:
- According to the performance on today's chart, the general trend of the sterling currency pair against the US dollar GBP/USD is still downward.
- The break of the 1.2400 support confirms the extent of the bear's control over the trend.
- It moves the technical indicators towards strong selling saturation levels.
- Further losses of the currency pair are not excluded if the Bank of England this week confirms the market's expectations at the end of the tightening cycle.
Currently the closest support levels for the currency pair are 1.2340, 1.2280 and 1.2190 respectively. From the second and last level, it is better to think about buying the currency pair again. On the other hand, and in the same period of time, the bulls should move towards the resistance levels 1.2550 and 1.2730 to cause a breakthrough in the current downward trend.
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