Since the start of this week's trading, the price of the GBP/USD currency pair has been trying to hold firm in the face of the strength of the US dollar. Its gains did not exceed the 1.2800 level and settled around the 1.2722 level at the time of writing the analysis. We are waiting what is said by global central bank policy officials during the Jackson Hole Symposium. Yesterday, the sterling/dollar pair collapsed towards the support level of 1.2615, in light of the weak results of the British economic sectors, led by services.
Overall, the pound sterling remained the best performing major currency of the year in the mid-week trading session, but that could change during this fall “crisis season” in the markets if Nomura is right in advocating that clients bet big losses against the dollar and the euro during the coming period.
Avoiding a widely anticipated recession earlier this year helped sterling lift the price against all currencies in the G10 group of economies and most of the broader G20 currencies. This is thanks in part to resilient supply from the economy, but the cost of this outperformance can be calculated fully in the near future with potential implications for the pound sterling.
Interest rates have risen significantly since it became clear earlier this year that the British economy was outperforming the Bank of England's previous predictions of a prolonged recession, but some recent data suggests that higher interest rates are beginning to take their toll.
Notably, the official measure of unemployment has risen over the course of the year and more so in recent months due to a combination of workforce layoffs and a higher number of workers who were "inactive" — those who were neither employed nor looking for work — returning to work. However, so far at least, the British economy has continued to hold up while the Bank of England's forecast for August indicated economic growth of 0.2% per quarter in the latter half of the year.
According to Nomura analysts, “Our leading indicators continue to point to strong deflationary pressures going forward, but the tough inflation data gives a less convincing picture for the BoE to consider. Then when it comes to the labor markets, it's probably going to be a mixed bag for the BoE, with very strong wage growth. They still expect two more increases from the Bank of England. But the markets are getting on with the idea of three hikes (66bps rate by the end of the year), a figure we expect to prove wrong, as we head into the December meeting.
Overall, the bank interest rate was raised to 5.25% in August, from 0.1% in December 2021, marking the second largest increase in the Bank of England's 329-year history, but with inflation still above the 2% target by many analysts, economists and financiers. Markets are also anticipating further increases in the coming months.
Nomura has been forecasting for months that the pound will end the current September quarter at 1.26 against the dollar and roughly 1.1235 against the euro, down from 1.27 and 1.17 currently, but this week it told clients there was a risk of GBP/USD down to 1.22 by end of October.
The analysis team is betting according to targets and projections that involve losses of about four percent per pair over a short period of time, which we are expected to witness in a period that has been seasonally associated with increased volatility in financial markets over a long period. The months of September, October and November also hosted several economic or market crises involving the United Kingdom including the stock market crash of 1987, the exit from the European Exchange Rate Mechanism in 1992, the global financial crisis in 2008 and the collapse of the pound sterling in the aftermath of the financial crisis of Liz Truss' budget last year.
Sterling forecast against the dollar today:
- The general trend of the sterling currency pair against the dollar, GBP/USD, is still bearish.
- The current stability, as the currency pair, is awaiting what will be said by US Federal Reserve Governor Jerome Powell during the Jackson Hole seminar tomorrow, Friday.
- The US dollar is currently at the closest support levels, as is the case with the currency pair at 1.2675 and 1.2580, respectively.
- On the other hand, and over the same period of time, for a shift in the trend to bullish on the sterling / dollar pair, to return to the vicinity of the psychological resistance 1.30 again.
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