The GBP/USD exchange rate rose to its highest level in more than a year, with gains that reached the 1.2848 resistance level. This was before settling around 1.2785 at the time of writing the analysis, waiting for anything new. Uncertainty about how the Bank of England (BoE) will deal with a difficult test and decisions of the inevitable tough politics of next Thursday mean that the short-term outlook for Sterling is murky. The outlook for the medium term is crystal clear.
Overall, recent economic data covering wage growth and inflation has left the BoE's Monetary Policy Committee in a dilemma as it has to decide how far it should go to ensure inflation returns to the 2% target rather than self-sustaining at a higher level. But the market's high expectations mean that the pound could struggle much higher regardless of what the BoE does, while the risk is that Wednesday's pre-release inflation figures provide the market with an appetite for bets against the pound.
In this regard, Samuel Tombs, chief economist in the United Kingdom at Pantheon Macroeconomics, says: “We believe that the Monetary Policy Committee will play it safe and choose a 25 basis point increase in the interest rate this week, and will not live up to its prior rhetoric on reducing CPI inflation.” "The delays in the transfer mechanism and the economy's sensitivity to further increases in the bank interest rate indicate that it will not tie its hands more closely with the results of inflation in the near term," he added.
The consensus is that British inflation will decline from 8.7% to 8.4% this week but with the most important core rate remaining at 6.8% after rising from 6.2% previously, something that could have downward effects on the value of the pound. So far, the Bank of England has raised rates in increments of 0.25%, 0.5% and 0.75% but with little apparent impact on the domestic side of the inflation picture as core inflation appeared to be on the cusp of a fresh rebound in April.
The data released this time last month: Much of the increase in the bank rate has not yet been reflected in mortgage costs. The rise in the base rate reflects the acceleration of inflation within the domestic economy following the commodity price shocks of the past two years. This is a downward effect on the notional value of the pound unless the Bank of England becomes able and willing to offset it by raising the bank rate.
“The reaction of the pound will be determined by the size of the rate hike and the tone of the policy statement,” says Joseph Capurso, an analyst at the Commonwealth Bank of Australia. In the scenario of a report of high inflation and a 50 basis point increase, the GBP/USD could jump above the psychological resistance 1.30.”
Overall, economists and market implicit expectations suggest the Bank of England is likely to raise the bank rate in increments of 0.25% on Thursday and in the months that follow. It is moving from 4.5% to 5.75% by the end of the year, but it is not clear if that will be the case. It will also keep the price of the pound against the dollar from declining in the meantime. This could be especially true if the kind of wage growth revealed by the ONS employment figures last week eventually leads to the dreaded “wage price inflation” spiral that leads the market to wonder whether the Bank of England will be able to bring inflation back to normal. Normal situation. and a target of 2% with the write off the economy and the financial system.
Sterling forecast against the dollar today:
- According to the performance on the daily chart below, the price of the GBP/USD currency pair is still stable around the recent rebound gains.
- The bulls are waiting for more stimulus to complete the rebound.
- The GBP/USD may reach the psychological resistance level 1.3000 easily, if it moves towards the resistance levels 1.2875 and 1.2930, respectively.
On the other hand, and for the same period of time, the currency pair may give up a lot on its bullish outlook, in the event that it returns to stability below the support level 1.2675. I expect the currency pair to stabilize around its current performance until the reaction to the decisions of the Bank of England and the testimony of US Central Bank Governor Jerome Powell.
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