Tomorrow the Bank of England is expected to stop the course of tightening its policy, which was the reason for the collapse of the price of the GBP/USD currency pair to the lowest support level of 1.2368 in three months. Balam tried to rebound higher, but his gain did not exceed the resistance level 1.2425. It settled around the 1.2390 level at the time of writing the analysis before the announcement of the British inflation figures which will have a reaction to the Bank of England announcement tomorrow.
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Despite a month of selling, sterling is unlikely to face significant weakness going forward according to new research by one of Europe's leading investment and commercial banking providers. As BNP Paribas says the pound - which until recently was the best performing currency in 2023 - is likely to remain stable in the near term as higher interest rates at the Bank of England will be difficult for global investors to ignore.
In this regard, Barisha Saimbi, foreign currency forex analyst at BNB Bariba Bank, says "The pound sterling offers better carry expectations than its counterparts in the G10 currencies, especially since inflation that is still high means that interest rates may rise further and need to stay higher for a while longer and its low sensitivity to China is likely to explain sterling's outperformance against its high-beta G-10 peers this summer. "
In the forward trade, the investor will borrow a currency with a low interest rate to buy a currency or asset that receives a higher interest rate. The forward deals are considered one of the most traded strategies in investing in foreign currency and are of particular importance at the present time since the central banks have raised interest rates from stable levels close to zero.
The pound sterling is a clear beneficiary in this regard, as the Bank of England has raised the key interest rate to higher levels than its counterparts in the Group of Ten. Accordingly, BNP Paribas expects the strong position of sterling (against major currencies) and the less sensitive credit notes towards China to create more stable expectations in the coming weeks. The analyst added by saying: "We expect this background to continue in the near term, which keeps the sterling stable."
This call comes amid a period of weak performance for the pound sterling which has seen it decline against most other major currencies and raises questions about whether more losses are likely to occur as the most obvious downward trend surrounds the currency. In fact, sterling was the worst performer of the major currencies during the August to September period, largely because investors cut back significantly on the amount of rate hikes, they still expect the Bank of England to deliver.
This goes back to the transportation trade; As the rate advantage provided by the Bank of England becomes less pronounced, sterling's upward pull is fading. While sterling could remain supported in the near term thanks to high interest rate settings in the UK, BNP Paribas is watching for weakness over a multi-month time frame.
The negative risks include the potential recession in Britain, which BNB Bariba expects to occur in the first half of 2024. At the same time, one of the possible sources of support for the pound sterling until 2023 is the narrowing of the current account deficit in the United Kingdom as a result of lower energy prices. This means Britain paid less foreign exchange to foreign suppliers than it did in 2022, providing a clear source of support for the currency.
BNP Paribas is one of the speculators of a "structural" drop in the dollar and expects the US dollar to eventually fade, allowing the pound sterling to rise against the US dollar from here. They have a point forecast for the exchange rate at 1.29 for the end of the year until the end of the third quarter of 2024, when the rate is expected to rise to 1.30 ahead of 1.32 by the end of 2024. At the same time the EUR/GBP forecast is set at 0.85 for the year end, and 0.86 for the end of the first quarter, and 0.87 for the end of the second, third and last quarter of 2024.
Today's sterling vs. dollar expectations:
- There is no change in my technical point of view for the price performance of the GBP/USD currency pair.
- The general trend of the currency pair is still downward.
- Although its recent losses have moved the technical indicators towards strong sell saturation levels, the pressure factors on the pound remain.
- There will be no opportunity to reverse the direction, even if temporarily the British inflation numbers come stronger than expected and the American Federal Reserve Bank abandons the tightening tone of its policy.
If that happens, the bulls may find the opportunity to move towards the 1.2540 and 1.2630 levels respectively. If the data and events come in contrary to what was mentioned, there will be no more downward pressure on the sterling pair against the dollar.
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