During yesterday's trading, the price of the GBP/USD currency pair was exposed to profit-taking sales. It reached the support level 1.2263, bouncing down from the resistance level 1.2447. Selling came technically, with the technical indicators reaching overbought levels, which we previously noted. In addition, the results of the recent British economic data was announced, and the GBP/USD pair stabilized around the level of 1.2325 at the time of writing the analysis.
The British pound fell after purchasing managers' index data showed that the British economy slowed faster than expected in January, a result that contrasted negatively with surprisingly strong euro-zone numbers. The UK Services PMI for January came in at 48, well below economists' expectation of 49.7 and down from the 49.9 previously reported.
A reading below the 50 level indicates that the largest and most important sector of the British economy has contracted and indicates a soft start to the year.
Expected Bearish Impact on GBP
The composite PMI - which gives an indication of the overall economy's performance - read at 47.8, down from December's 49 and below analysts' expectations of 49.1. The lack of expectations has sent the British currency lower. The figures confirm that the British economy may finally succumb to recession, after apparently avoiding such an outcome in the last quarter of 2023. Markets are therefore betting that the deterioration in the survey data may prompt the Bank of England to raise interest rates by 25 basis points on February 02, which would be less than the 50 basis point rise that markets were expecting at the beginning of this week. Re-pricing lower in BoE forecasts will have an expected bearish impact on the GBP.
The report adds that service providers have suffered a significant loss of momentum since December, with respondents citing higher interest rates and lower consumer confidence as the main factors that have hindered business activity. Decreased household income and lower business investment were among the driving factors behind the decline in activity. For their part, companies said that wage pressure was a major factor leading to an increase in business expenses, but this was offset by lower fuel bills, commodity prices and shipping costs.
For its part, the Bank of England raises interest rates to try to calm domestically generated inflation, which is usually driven by higher wages. It is particularly keen to ensure that a wage-to-price spiral does not occur, in which wages are increased which in turn leads to an increase in inflation.
The PMI survey suggests this may be starting to happen, with S&P Global saying: "Average prices charged by private sector companies rose sharply in January, driven by historically strong inflationary pressures and efforts to pass employee wage increases." Despite the downbeat headlines, the same report found that the business outlook for the year ahead improved significantly in January. As this index rebounded every month after the lowest point seen in October 2022.
For the British pound, the numbers will reignite bearish bets against a currency that a number of economists and market participants see as being held back by poor economic performance. In fact, UK data stands in sharp contrast to Eurozone data as the PMI posted growth in December.
GBP/USD forecast today:
- According to the performance on the daily timeframe chart below, the GBP/USD currency pair is still bullish.
- There will be no first break of the current trend without the stability of the currency pair below the support level 1.2190.
- On momentum, the closest support levels for the currency pair will be 1.2380, 1.2420, and 1.2500, respectively.
- The currency pair does not await important and influential data, whether from Britain or the United States, and therefore investor sentiment will have the strongest impact on performance.
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