After sales recently happened to the GBP/USD currency pair, it declined in its wake in the middle of this week's trades reaching the support level of 1.2263.
- The bulls have returned to stability at the price of the currency pair of sterling/dollar around the resistance level of 1.2395 again.
- This is at the time of writing the analysis where the pressure is still on the US dollar.
- At the beginning of this week's trading, it rose to the resistance of 1.2447, the highest it has been in seven months.
The US dollar will rebound in the first half of 2023, but the strength is unlikely to exceed the highs it hit in September 2022, according to a new analysis of the forex market by Capital Economics. The independent research and advisory provider expect a strain in global risk appetite linked to the recession in developed markets over the coming weeks and months, which will boost appetite for the dollar in the short term.
These expectations come amid a wave of dollar weakness that led to its decline against most major currencies. Over the past month, it has fallen against all its G10 peers, with the exception of the Norwegian krone. This weakness coincided with the rise of the pound sterling against the dollar exchange rate (GBP / USD) above the psychological resistance 1.20 and the highest levels are tested at 1.2448 in mid-December and again on January 23.
A more assured bounce in the dollar would put GBP/USD on the alert for another drop below 1.20, but Capital Economics analyst Jonathan Petersen says the dollar won't test or break its highs in 2022. The deep dive into early 1.10 seems far away. The analyst added, "With the decline of inflationary pressures and the improvement of global growth prospects, we no longer expect the US dollar to break through its peak in late September."
Limiting dollar strength are two key drivers of outperformance in 2022 now working as headwinds, and these include the Fed's desire to raise interest rates faster and farther than other central banks. He also said "the relative monetary policy and the propensity to take risks have turned from the tailwinds to the headwinds for the dollar". The other impetus for the strength of the US dollar was the harsh market sentiment that resulted from the rapid rise in US interest rates, the global economic slowdown associated with the war in Ukraine, the rise in gas prices, and China's policy that undermines growth in China. Gas prices have fallen sharply, the Fed is nearing its final destination on interest rates, and China has given up on the lack of covid.
So what might prompt the dollar to bounce back in the short term?
The analyst says: "We still believe that the decline in risk appetite associated with the recession in developed markets will strengthen the dollar in the short term." Accordingly, a number of economists expect a "stagnation in profits" to occur in 2023 as companies reveal poor performance, which in turn leads to a reevaluation of stock market valuations. The analyst adds by saying: "We doubt the exaggeration of the optimism about the global economy, and we believe that the beginning of the recession in the United States and other developed markets will lead to a renewed decrease in risk assets."
Furthermore, Capital Economics believes that the relative monetary policy trade now appears to be largely discounted, and in the meantime, positioning is more balanced with net speculative positions receding from peak levels. In general, the dollar has been the main driver of the GBP/USD exchange rate movement recently, so any material rebound in the dollar could pose downside risks if it materializes.
Today's sterling vs. dollar expectations:
According to the performance on the chart for today's time frame below, it seems clear that the bulls continue to control the price direction of the GBP/USD pair, but this lacks a strong and continuous wound to complete the current rebound. This may happen if the results of the US economic data today come in lower than expected and in favor of calming the tightening of the US central bank's policy. Therefore, the best bulls will have the opportunity to move towards the resistance levels 1.2465, 1.2520 and 1.2600 respectively, which I see as opportunities to sell again.
There will be a setback to the current rebound if the bears settle in the sterling dollar currency pair below the 1.2185 support level. Which in turn will increase expectations to move towards the psychological support of 1.2000 again.
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