- The GBP/USD exchange rate entered the new year 2023 with a strong foothold above the 1.20 level.
- Inflation differentials indicate that it is undervalued while it is below 1.25, although the risk is represented in the important US economic data that tilts against no rebound by GBP later in the week.
- During a strong recovery of the US dollar against the rest of the other major currencies, with the return of liquidity to the markets, the GBP/USD collapsed towards the support level of 1.1899, before settling around the level of 1.1990 at the time of writing.
Prior to that the US exchange rates were pretty much a directionless bag during the last week of the year. Additionally, price action saw GBP/USD benefit from a stubborn attempt the GBP fell near the significant 1.20 level and at levels that reflect a significant drop in the value of the pound if inflation differentials are anything to go by.
GBP/USD is cheap
Using the latest spread for inflation and bank rate deflation from the beginning of January 2022 level around 1.3507 indicates that GBP/USD is cheap while trading below 1.25 and that a suitable trading range is likely to extend the gap between there and 1.2850 in rough terms. However, the market remains bearish in its outlook for the Sterling and the UK economy while there is a risk or chance that important pieces of pending US economic data could provide the market with inspiration for new bids for the dollar exchange rates later in the week.
GBP/USD fell by more than ten percent last year while the gloomy outlook for the British economy and the slow pace of rate hikes from the Bank of England (BoE) relative to the Federal Reserve (Fed) were the main catalysts for the British economy. The market is still bearish.
However, with the British economic calendar offering little interest to the pound during the opening week of the new year, the action-packed US calendar is likely to pose a risk or opportunity for the GBP/USD rate in the coming days. Commenting on this, Adam Cole, Chief Forex Analyst at RBC Capital Markets, said: “Today the minutes of the FOMC meeting are released on December 14, when the Fed raised the chart average end-point of 2023 to 5.1% (maximum forecast). And Powell downplayed the softer inflation reports for October and November.”
While Wednesday's release of minutes from the Fed's December policy meeting will be closely scrutinized by the market, the most important data point this week will be the release of the December non-farm payrolls report with its message about the strength of the US labor market and its outlook for wage growth.
Sterling forecast against the dollar today:
- The stability of the GBP/USD price will remain below the psychological support level of 1.2000, supporting the strength of the downside trend.
- This will bring more downward movement and stronger bear control towards the support levels 1.1900 and 1.1820, respectively, which are sufficient to push the technical indicators towards Strong oversold levels.
On the other hand, according to the performance on the daily chart, breaking the resistance level at 1.2240 will be important for the bulls of the GBP/USD pair to control. I still prefer selling GBP/USD from every upside. The currency pair will be strongly affected today by the announcement of the minutes of the last meeting of the US Federal Reserve, and then the US jobs numbers on Friday.
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