- Sterling has now been under constant pressure for 11 weeks against the US dollar.
- There is no indication that the sell-off is about to end, with most analysts saying that the 1.20 psychological support level will be targeted in the coming weeks.
- Some stability is expected in the near term.
- The losses of the sterling currency pair against the US dollar GBP/USD hit the 1.2193 support level, its lowest in six months, before settling around the 1.2215 level at the beginning of today's trading.
The selling of sterling accelerated last week after the Bank of England temporarily suspended its rate hike cycle while giving no clear evidence of its intention to raise rates again. The net result was an additional decrease in British bond yields at a time when American bond yields were rising, creating a scenario in which the gap between the two - known as the spread - widens in favor of the dollar.
The US dollar is certainly under pressure against most of its G10 rivals as investors sell bonds as US economic strength prompts investors to be wary of a possible November interest rate hike by the Federal Reserve. At the same time it is reducing expectations for cuts in 2024 Commenting on the performance, Fouad Razzaqzadeh, an analyst at Citi Index, says: "The US dollar continues to find support against all competitors, especially against the yen, the pound sterling and the euro, which are the currencies in which the central banks are relatively more pessimistic than the Federal Reserve Bank."
The analyst for the expectations of the sterling pound reveals the possibility of a "greater scope for the downward trend".
The pair hit a fresh six-month low near the 1.22 level on Friday, as momentum from Wednesday's weak inflation and Thursday's Bank of England decision countered a surprisingly weak UK PMI reading. Where the analyst added by saying "With the support break around 1.23, the path remains the least resistant to the negative side of the pound sterling. From here, we can see the price drop towards 1.21 and maybe the 1.20 psychological support in the next week. And these levels were supportive earlier this year, and it is now where the 38.2% Fibonacci retracement level begins to have an effect in the long term."
Overall, the sterling selloff may soon reach overextended levels, at which point the possibility of a temporary, short-term recovery could emerge. Looking at the target resistance points, the analyst says that the area between 1.2308 and 1.2332 is important because it forms the previously broken support area. This area needs to be defended by the bearers now if they want to maintain control of the price movement.
Moving on to the economic data calendar, the week's two main releases are on Friday, with a handful of second-tier numbers emerging over the previous days, none of which will provide much excitement for the pound. Friday's US personal consumption expenditure inflation number will be notable because it could further support the dollar's recent trend of stability if it comes in ahead of expectations. The core personal consumption expenditure rate is expected to rise by 0.2% month-on-month in August, with any weakness likely to help the sterling rebound, especially if UK GDP data beats expectations.
Friday will see the second release of UK GDP data for the second quarter, meaning the potential impact of the numbers on the market will be minimal. However, markets are looking for GDP growth in the second quarter to reach 0.4% on an annual basis and 0.2% on a quarterly basis. Any big deviations can lead to some volatility in the short term.
Today's sterling vs. dollar expectations:
According to the performance on today's chart below, the general trend of the currency pair GBP/USD is still downward. Although the technical indicators are moving towards strong sell saturation levels, the continuation of the downward pressure may push the currency pair towards stronger support levels. The next important target will be psychological support 1.2000. It will be available if the currency pair depreciates first towards 1.2110.
This may happen quickly if the dollar gets a new positive wound from this week's data. On the other hand, and in the same time period, there will not be a first break in the trend without moving the currency pair towards the resistance level 1.2585. Today, the currency pair will react to the announcement of the reading of American consumer confidence and the number of new American home sales.
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