The pound sterling against the US dollar GBP/USD continues to bleed losses strongly. The 1.2135 support level reached its lowest level in more than six months. The performance came where the US dollar is still the strongest against all other major currencies with the momentum of the continued tightening of the US central bank's policy along with the demand for buying the US dollar as a safe haven. The forex traders' eyes are currently moving towards the possibility of moving the sterling/dollar towards the psychological support level of 1.2000. This is included if the factors of currency pair weakness continue.
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What is expected for the pound sterling in the coming period?
The forex research and strategy team at Goldman Sachs lowered their expectations for the pound sterling as they announced that they had "officially turned to bearish sterling". This call is notable given that Goldman Bank has been on the right side of the pound's rise over the past year, but their view has changed following the Bank of England's decision to temporarily suspend its interest rate hike cycle on September 21.
The new forecast levels are notable because they are in line with values reached in previous crises that focused on the United Kingdom - such as Liz Truss's small budget, but Goldman Sachs analysts point out that the essence of their downgrade is the "dovish" tendencies of the Bank of England. In this regard, a note from Goldman Sachs says: "After being the best performing G10 currency so far at the beginning of the summer, the British pound has lost most of its gains by the end of the summer. It exceeded the weaker cyclical expectations in Europe, and moreover, the cautious reaction of the Bank of England, the benefits from lower energy prices (compared to last year) and broadly constructive risk sentiment."
Goldman's previously bullish stance on sterling was based on the assumption that the Bank of England would raise interest rates to 6% due to strong economic data in the UK, which would boost the value of financial assets in Britain compared to places where central bank rates were lower. But Goldman analysts point out that the bank is maintaining a "relatively dovish reaction" to the data which means even the slightest dip in the UK data pulse has been seen as a reason to hit the pause button.
Overall, expectations for a UK interest rate hike have fallen steadily since August as the data receded, but the decision to forgo a September interest rate hike is still surprising as recent UK labor market and wage data proved strong. It seems that the British Central Bank has relied heavily on the inflation figures released last week which came in on the weaker side of expectations as did the Purchasing Managers' Index numbers for the month of September, which the bank was aware of before the official release.
Goldman Sachs economists add that the Bank of England has completed a cycle of raising interest rates. Where the bank says: "The combination of weak growth, high inflation and low real interest rates is a negative combination for the currency. If the incoming activity data reflects a more negative picture of local growth than we expect, the currency will come under more pressure."
Accordingly, Goldman Sachs lowered its expectations for the pound sterling against the dollar GBP/USD to 1.18, 1.20 and 1.25 within 3, 6 and 12 months from 1.24, 1.29 and 1.33 previously. Expect the Euro to Pound exchange rate to reach 0.91, 0.92, 0.90 during the same time frame, up from 0.86, 0.85, 0.84 previously. Note that these levels are typically associated with UK-centric crises of confidence, notably the 2008 financial crisis and the Liz Truss mini-budget.
Today's sterling vs. dollar expectations:
- The general trend of the sterling against the dollar GBP/USD is still downward.
- Its recent losses were enough to push the technical indicators towards strong sell saturation levels.
- A move towards the psychological support level of 1.2000 is not excluded if the current positive momentum of the US dollar continues and the Bank of England insists on stopping the pace of tightening its policy.
- I prefer to think about going back to buy the currency pair instead of selling.
The closest support levels for the currency pair are 1.2100 and 1.2025 respectively. A break in the general downward trend as per the daily chart below on the currency pair, moves towards the resistance level 1.2550 first.
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