- In mid-trading this week, the British pound rose to its highest level in a week against the US dollar and tested the top of the main range against the euro, supported by positive investor sentiment.
- Yesterday, the GBP/USD pair moved higher towards the resistance level of 1.2747 before being hit by profit-taking selling that pushed it towards the support level of 1.2648 and is stabilizing around 1.2680 at the time of writing.
Global risk sentiment is positive, with the S&P 500 stock index hitting a new record high on Monday as investors look ahead to a year when central banks begin to cut interest rates. Therefore, the pound tends to advance against the euro and the dollar in such environments, allowing it to shake off the weakness that followed the release of surprisingly weak UK retail sales data last Friday and extend its 2024 rally.
Commenting on the pound's performance, Kamakshya Trivedi, an analyst at Goldman Sachs, said, "The pound is a unique currency that tends to perform particularly well in an environment of moderate interest rate volatility and thriving stock prices."
The S&P 500 reached a new all-time high of 4,868 on Monday, while the pound's exchange rate continued to rise. Magnus Poulsen, an analyst at Danske Bank, said, "It seemed like investors were buying this rise because they realized they had missed out on the strong rally in recent weeks with growth and inflation expectations improving more than expected."
Meanwhile, the recent gains mean that the pound has regained the title of best-performing G10 currency for 2024 amid supportive global equity markets and a recalibration of market expectations for the amount of potential interest rate cuts from the Bank of England in 2024. As the new year approached, markets were expecting a cut as early as March, but the decline in interest rate expectations from the Federal Reserve and strong data in the UK means that markets are now fully priced for a rate hike in June.
This was reinforced by last week's above consensus inflation reading which revealed that year-on-year CPI inflation had returned to 4.0%. Accordingly, Christopher Wong, an analyst at OCBC Bank, says that he sees room for the pound to recover on a set of moderate positives, demand growth in the UK has proven resilient (due to a strong labor market and low energy prices). In addition to the recovery of consumer confidence. The labor market remains tight and real wages rise. At the same time, the Bank of England is likely to keep interest rates high for a longer period (yield attractiveness). While the better financial situation allows for a certain degree of stimulus before the elections.
For his part, Wong says that the Bank of England may have room to keep interest rates high for a little longer than the US Federal Reserve and the European Central Bank.
Ultimately, a risk to the outlook is the Bank of England “pivot” earlier than expected as the bank signals it will cut interest rates soon. Another risk is a deteriorating global stock market backdrop, which could lead to a reversal of some of sterling's recent gains in a 'risk on' situation. Also, Wall Street's S&P 500 index reached its first record close in more than two years on Friday, the CEO of one of the world's largest independent financial advisory and asset management firms issued new warnings to investors. Nigel Green, CEO of deVere Group said, “With the S&P 500 hitting 4,800 for the first time in its 66-year history, it is all too easy for investors to become overly confident and complacent,”. He added, “Markets are getting ahead of themselves.” “Most of this madness is driven by the hype that the US Federal Reserve is about to start cutting interest rates after its most aggressive tightening agenda in generations.”
Finally, the analyst cautions that although inflation has certainly come down from multi-decade highs, it remains steady.
GBP/USD Expectations and Analysis Today:
So far, the general upward trend for the GBP/USD currency pair has not been broken, and this may happen if the currency pair moves towards the support levels of 1.2620, 1.2510, and 1.2440, respectively. On the other hand, with the same performance on the daily chart below, the resistance level of 1.2775 may remain the most important for the continuation of the bullish outlook. Today, the Sterling/Dollar pair will be affected by the reaction to the announcement of purchasing managers’ index readings for the manufacturing and services sectors from Britain and the United States, in addition to investor sentiment and the performance of global financial markets.
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