- The pound is making a desperate attempt to defend the temporary support levels it has established against both the euro and the dollar ahead of the Bank of England's all-important interest rate decision this week.
- Moreover, the pound-to-euro exchange rate maintains levels above 1.1450 while the pound-to-dollar exchange rate defends the support located at approximately 1.2075.
- During last week's trading, the GBP/USD pair fell towards the support level of 1.2069 before closing trading around the level of 1.2116.
Brtish Pound Still Weak
Overall, the pound ultimately failed to benefit from the weakness in the euro that followed the European Central Bank's policy decision last Thursday to keep interest rates at unchanged levels, a decision that some economists say is evidence that the central bank has completed its cycle of raising interest rates. Although the European Central Bank said it was willing to raise interest rates again in the future, due to uncomfortably high inflation, it emphasized the sharp decline in inflation recorded in September.
Meanwhile, the GBP/USD exchange rate remains vulnerable to new declines due to the broad strength of the US dollar, which has been reinforced by a range of factors, including shaky global investor sentiment, rising US bond yields, rising oil prices and the sovereign debt crisis. Superior, to the local economy, the economic outperformance was reinforced with the release of above-consensus US GDP figures for the third quarter, which showed the US economy growing by 4.9%, defying investor expectations for an increase from 2.1% in the second quarter to 4.3%.
Unfortunately, the US dollar did not benefit from the numbers for two reasons. Firstly, much of the US's superior economic performance is already built into the value of the US dollar.secondly, economists see some one-time factors at play and warn that the dollar is overvalued. With the possibility of negative growth in the last quarter of this year. In this regard, Bill Devinney, economist at ABN AMRO Bank, says: “We expect a significant recovery in the fourth quarter after the exceptional strength in the third quarter, with a high probability of a clear decline in GDP.”
Despite the temporary gains, the pound was unable to reverse the losses it suffered against the dollar earlier in the same week, and could not close above 1.15 against the euro. Overall, it is unlikely that a confirmed rise will occur before the Bank of England’s decision this week, which will likely lead to another “dovish” result for the pound. Also, The British central bank is globally expected to keep interest rates unchanged at 5.25% given the continued decline in inflation and will be keen to confirm that interest rates will remain at current levels for an extended period. Finally, when the central bank says something and fails to back up those words with action, the message can ring hollow, and that is the main downside risk for sterling this week.
GBP/USD Outlook & Predictions
According to the trades on the daily chart below, the price of the British pound against the US dollar GBP/USD is still in a strong downward trend. Also, as we mentioned before, the movement around and below the support level 1.2150 will remain supportive of a stronger downward movement that may reach the psychological support 1.2000 as soon as possible. This week, markets and investors will be on a date with the policy announcement of both the Bank of England and the US Central Bank, ending with the US jobs numbers, all of which are important events that affect the performance of the currency pair. On the other hand, over the same period, bulls must move the currency pair towards the resistance levels of 1.2330 and 1.2450 to break the current general downward trend.
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