Two days after the GBP/USD was subjected to selling operations the currency pair moved towards the support level of 1.2106. It then rebounded to the upside and settled around the level of 1.2225 at the time of writing. It seems that the fluctuation confirms the extent of the dispersion of investor sentiment in the markets. The bears in the equity markets may be about to make a comeback “in earnest,” warns Morgan Stanley in a forecast that, if true, could usher in a period of weakness for sterling. The pound sterling is closely linked to global risk appetite and appreciated in October, November and December as equity markets rebounded.
Can the rally continue into the new year, a year when the world's major economies are expected to fall into recession?
Analysts at Morgan Stanley have been jump-riding in what they describe as a tactical game because they believe the long-term bear market is still intact. So says Michael J. Wilson, equity analyst at Morgan Stanley. “As was suggested a couple of weeks ago, for this tactical rally to pick up, back rates need to come down. Fast forward to today and this is what happened. However, we are now at our original bullish targets and recommend taking profits before the bear returns in earnest.”
The pound has recovered from record lows against the dollar and multi-month lows against the euro in recent weeks in a move coinciding with a recovery in global equity markets. How it trades at the end of the year will likely depend on what happens to this equity space. For his part, Dominic Banning, Head of European Forex Research at HSBC, says: “The pound sterling has been strongly affected by the broader risk appetite this year, and stock movements are generally considered the dominant driver for the pound.”
But why are stocks important to the pound sterling?
An indicator of international investor sentiment is stock performance, which is crucial in the context of Britain's current account deficit: the UK's current account remains in deficit as the UK imports more than it exports, meaning it buys more foreign currency than it earns. For its part, the Office for National Statistics said that the primary British current account deficit stood at 5.3% of GDP, and analysts strongly emphasize the importance of the deficit in determining the outlook for sterling. For example, RBC Capital is betting on a decline in the pound sterling / euro during 2023 due to the country's dual deficits.
Despite the foreign exchange outflows implied by the current account deficit, the pound could hold steady or even rise if foreign investors buy assets in the UK, and/or if British investors repatriate profits from foreign investments. This dynamic makes sterling vulnerable to moments when foreign investor flows dry up, as is usually the case during global markets in a downturn. The implication is that the pound is likely to fall again if global equity markets return to the broader bearish trend that has been in place since 2021. There is no sign more relevant to the health of global investor sentiment than the performance of the US stock index S&P 500.
He believes the risk-reward play for further upside is very thin at this point, which means chasing GBP higher may be less attractive than it has been in recent weeks.
GBP/USD forecast today:
- It seems clear that the price of the GBP/USD pair is still under downward pressure.
- For a break of the bullish trend, the currency pair must move towards the support levels at 1.2070 and 1.1890, respectively.
- On the other hand, and over the same time period, breaking the resistance 1.2300 will be important for the bulls to gain control.
- At the same time it will move the technical indicators towards overbought levels.
- The sterling-dollar pair is not awaiting important economic data other than announcing the number of weekly US jobless claims, and it will also be affected by the performance of global stock markets and whether or not investors are willing to take risks.
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