In light of a holiday in most markets, quiet or almost non-existent movements are expected for the price path of the GBP/USD currency pair. GBP/USD closed last week’s trading stable around the 1.2350 level, and its gains in the last session reached the level of 1.2396. This was the lowest level of bears’ control over the trend last week. The support level is 1.2307.
GBP/USD's rebound last Friday was limited if UK economic data encouraged financial markets to maintain their sharply increased expectations of the Bank of England (BoE) interest rate. Friday's UK retail sales report had a positive reaction as it indicated that high street spending in Britain grew faster than expected by economists last month, although a temporary bounce back may be in for a borrowed time already.
Dollars were sold off broadly amid reports that an agreement to raise the US government's debt ceiling for two years is almost in the works, but sterling stems from inflation figures released earlier this week and the resulting sharp increase in implicit expectations for the Bank of England's rate. Commenting on this, Nikesh Sujani, chief economist at Lloyds Commercial Banking, said: “We have raised our forecasts with core CPI inflation not expected to fall below 4% until early next year (from our previous view that UK CPI inflation would be flat). Level ‘3’ by the end of 2023,” he adds, “However, Ofgem’s latest energy price cap announcement means combined electricity and gas prices will drop by about 17% in July, while the latest energy futures prices suggest a lower potential.”
UK headline inflation was slower to fall last month than expected by the vast majority of forecasters while the more important core inflation rate rose 6.3% to 6.8% when it was expected to decline in what was a potentially troubling development for the Bank of England and the UK economy. Expectations embedded in the interest rate derivatives market have jumped indicating a high probability of another 100 basis point rate hike to 5.5% this year as a result, dampening the outlook for the UK economy and potentially having positive repercussions for the pound.
Overall the Pound benefits so far from anything that leads the US dollar lower and could rally even if UK economic data holds but the risk is that positive economic numbers will make a 5.5% hit in the Bank more likely. At the very least, any continued economic resilience will encourage financial markets to maintain the assumption that the bank rate will eventually rise to perceived high levels, and the risk is that this will lead investors to bet against the pound or avoid buying it.
Conversely, sterling may reverse some of its recent losses in response to whatever leads to interest rate expectations and lower bond yields.
All of which means that UK economic figures are likely to be increasingly important in the weeks and months ahead, although fortunately for the pound, there are a number of reasons why inflation should be surprisingly on the downside from the expectations upgrades that followed Wednesday's data. The planned reduction in the price ceiling of the household energy bill is one of the sources of potential downward pressure on the inflation rate, despite the possibility of lower prices in material prices in other categories such as communications, and perhaps also the food category. In addition, telecom prices — phone and broadband tariffs — more than doubled in April, but price increases in this category tend to be once a year, while the same is true of regulated price items such as alcohol and tobacco.
Technical analysis of the British pound against the dollar:
- On the near term, according to the performance of the hourly chart, it appears that the GBP/USD is trading within a bearish channel formation.
- This indicates a significant short-term bearish bias in market sentiment.
- Therefore, the bears will be looking to extend the current extension of the decline towards 1.2277 or below to support 1.2226.
- On the other hand, the bulls will be looking to pounce on profits around 1.2378 or higher at the 1.2427 resistance.
On the long term and according to the performance on the daily chart, it appears that the GBP/USD currency pair is trading within a bearish channel formation. This indicates a significant long-term bearish bias in market sentiment. Therefore, the bears will target long-term profits at around 1.2157 or below at the support 1.1965. On the other hand, the bulls will target profits around 1.2491 or higher at the resistance 1.2678.
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