- At the end of last week's trading, the price of the GBP/USD pair tried to rebound higher to compensate for its losses in the same week.
- Recently, it has reached the support level of 1.2535, and the gains of Friday's rebound reached the resistance level of 1.2624 before closing trading around the 1.2599 level.
- So far, the US dollar remains the strongest against the rest of the other major currencies in light of the strong performance of the US economy despite the tightening policy of the US Federal Reserve.
What is expected for the price of the Sterling in the coming days?
The British pound is expected to resume its run as one of the best-performing currencies this year despite the British economy's slide into recession, according to market watchers from Bank of America to Credit Agricole SA. They point to green economic shoots and an inflation rate that doubles the Bank of England's target, strengthening the case for keeping interest rates high for longer. Against this background, they argue that the price of sterling will reflect its recent weakness. Consequently, this is supported by data indicating how investors are betting on the currency. Bets on further strength have jumped but are still lower than in July - when the pound was trading above $1.30 compared to around $1.25 now - suggesting there is room for traders to increase their exposure.
Against the euro, the British pound broke a series of gains that lasted for seven weeks, affected by the data released last Thursday, which showed the slide of the British economy into last year's recession. However, Bank of America went so far as to describe it as "Europe's dollar," indicating the significant rise the US currency has seen in recent years, surpassing all other major currencies. Clearly, this sharp upward trend contradicts the prevailing pessimism towards Britain, where growth appears weak and the economy, suffering from strikes and labor shortages, struggles to adapt to life outside the European Union.
In this regard, regarding forecasts, Valentin Marinov, Head of Forex Research at Credit Agricole, expects the pound sterling to rise by 10%, stating: "Britain has become a low benchmark for anyone else in the G10 with all the problems the economy dealt with in 2023." At a level of 0.83 against the euro, the pair fell below 0.85 for the first time in six months on Wednesday. He added, saying, "However, not all data was terrible." Also, "The pound sterling could become more attractive, especially as monetary tightening pressures the US economy and affects growth expectations in the euro area to a greater extent."
Overall, business surveys in the UK indicate that activity is gradually picking up, albeit from low levels. Unexpectedly, the S&P Global Composite Purchasing Managers' Index rose in January to its highest level in seven months. Moreover, UK retail sales data on Friday recorded the largest monthly increase in nearly three years. At the same time, the British labor market has proven to be remarkably resilient despite monetary tightening, which has pushed the key interest rate to 5.25%, its highest level in 16 years. Finally, the unemployment rate is at 3.8%, near its historical lows, while wage growth is slowing.
It is certain that policy tightening could affect the pound sterling in the long term if it has a greater impact on growth. Bank of England officials are particularly concerned about hot services inflation. On the other hand, MUFG Bank, which recommended selling the euro to buy the pound sterling late last month, considered closing trade last week after the pound sterling failed to rise above the 0.85 support level. At present, the bank is committed to its call to move to 0.8275, given the possibility of the European Central Bank rejecting a rate cut decision in April.
Obviously, Options markets indicate that traders are not convinced by the euro's recovery last week. Also, Three-month risk reversals in EUR/GBP fell to their lowest level since March 2022, a sign of traders' willingness to pay a greater premium for options with lower strikes versus higher strikes.
GBPUSD Expectations and Analysis Today:
According to the performance on the daily chart above, the price of the GBP/USD pair is still bearish, and the bears’ control over the trend may increase if it moves towards the support levels of 1.2510, 1.2445, and 1.2380, respectively. Technically from the last level, the technical indicators will move towards strong saturation sale levels. On the other hand, over the same time period, and as we mentioned before, the resistance level of 1.2775 will remain the most important for bulls to start controlling the trend.
Today, calm movements are expected in light of the American holiday and weak liquidity.
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