- GBP/USD started this week's trading steady around the 1.2740 resistance level, which is close to the 1.2775 resistance that encourages bulls to move further upwards.
- The sterling/dollar pair may remain steady around its gains until the bulls gain additional momentum.
- The US Federal Reserve Bank, which has given signals through its officials that it is ready for high interest rates until the US inflation target is controlled, will have the word for this week's US inflation reading.
What is expected of the pound sterling in the coming period?
In this regard, the Forex currency analysis department at Credit Agricole expects the exchange rate of the pound against the euro (GBP/EUR) to rise to 1.19 at the end of 2024. In contrast, ING Bank still supports a decline to 1.1365. The GBP/EUR pair jumped to its highest levels in 3 months and tested the main resistance at 1.1765 after the UK inflation data as markets expected interest rates to be cut in June. It failed to break this area and retreated to 1.1735. Accordingly, NatWest expects resistance to be difficult to collapse. He reported, “The British pound is already trading near the €1.17 levels above which a breakout has seemed difficult to sustain in the past – and could once again cap the upside,”.
Overall, monetary policy will remain a key element for sterling, and fiscal policy is also important, especially with the general election in July. Polls give a very strong lead to the Labor Party with expectations that it will win a comfortable majority. In this regard, ING commented; "With the 2022 mini-budget crisis still fresh in the country's political memory, neither of the main parties is proposing a radical departure from current economic policy. Recently, both the Labor Party and the Conservatives have confirmed that they will stick to the current fiscal rules, which are overseen by the independent Office for Budget Responsibility."
According to the results of the economic calendar, monetary policy will be determined by the Bank of England. The latest inflation data recorded a major decline to 2.3% from 3.2% and the lowest reading since August 2011, but higher than the consensus expectations of 2.1%. The core rate fell to 3.9% from 4.2%, but above expectations of 3.6%. Services sector inflation fell only marginally to 5.9% from 6.0%.
In the wake of these economic data, the chances of a rate cut in June declined sharply.
Accordingly, ING commented; “This week's stubborn services inflation figures support an August rather than a June rate cut. Markets are pricing in only a 9% chance of a cut next month. It added; “However, don't assume the Bank won't move in June/July just because there's an election coming. The Bank of England's independence is a well-established and respected principle among the main parties, and interest rate cuts have been announced well in advance of election calls."
The bank summarized; "We maintain our view that EUR/GBP will rise as the BoE delivers 75 basis points of easing this year, more than the market is currently pricing in." Also, Credit Agricole sees a Labor victory as potentially positive for the pound in a more stable environment. It added; "Furthermore, some clients hope that a Labor government could pursue a policy of 'gradual convergence' with the EU, thus weakening the negative growth impact of post-Brexit trade barriers. This could help boost investment and domestic spending and support the UK's economic outlook and thus the attractiveness of sterling-denominated assets."
For its part, Scotiabank took a similar view. “A Labor government should not unduly worry investors – how much worse could it be than it has been in the last four years? Stability and the prospect of some “rapprochement” with the EU, or at least a reset of relations, would be a plus.
Furthermore, Socigen bank noted that the higher-than-expected inflation data make a June rate cut less likely but added; the BoE is likely to start cutting rates after the ECB, but over time will cut them more as there is no room for fiscal policy easing. Also, the latest data from the eurozone continued to point to a gradual recovery in the economy and wage growth was stronger than expected.
Despite the improvement in data, there are still very strong expectations that there will be a rate cut in June. Danske Bank has revised its medium-term ECB expectations; "We have reviewed the ECB's interest rate path for the first time in over 12 months and now expect the ECB to cut rates twice this year (June and December) and three times next year. This brings the deposit rate to 2.75% by the end of 2025."
Technical forecasts for the GPB/USD pair today:
Based on the performance on the daily price chart attached, the opportunity for the GBP/USD (British Pound vs. US Dollar) to rebound higher will be the strongest. As we mentioned before, staying above the 1.2775 resistance level is crucial for the bulls to move higher. If this level holds, the path could be clear for testing the psychological resistance at 1.3000, provided the pair moves towards the following resistance levels at 1.2830 and 1.2900, respectively. Conversely, on the same time frame, moving towards the support levels at 1.2645 and 1.2600 will be important for the bears to take control and undermine the current upward attempts.
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