The pound sterling has rebounded against the euro and the US dollar ahead of the testimony of the Governor of the Bank of England. Since the start of trading this week, bulls have been trying to push the GBP/USD above the resistance level of 1.2765, but gains have stalled ahead of the release of important US inflation figures later this week. Technically, GBP/USD pair is trading around the 1.2700 level at the time of writing. Today, Bank of England Governor Andrew Bailey is scheduled to testify before Parliament. It is expected that he will take a hawkish tone, as markets are pricing in early rate cuts and expectations may be overly pessimistic.
The price of the pound sterling rose slightly and became the second-best performing currency in the G7 during the past three months. In general, many market participants will still be thinking about Friday's US non-farm payrolls report and its implications. Moreover, the odds of a US Fed rate cut in March have fallen throughout the past week and are now a more reasonable 65%, after reaching 90% at the end of December. Obviously, strong jobs reports indicate that the odds may decline further as it is clear that the US economy does not need hasty action. In fact, the Fed may keep interest rates high until May or even later if the data remains strong. Moreover, they will want to see inflation sustainably near 2% and unlikely to bounce back.
The main event for this week is the release of the US consumer price index tomorrow, Thursday, which may lead to a cut or break of the interest rate in March. Furthermore, markets expect a slight increase in the consumer price index on an annual basis to 3.2%. Anything higher is likely to result in an early move off the table.
In contrast, data from the European Union will be on the quiet side throughout the week, and the United Kingdom has more releases due with GDP due on Friday and Bank of England Governor Bailey’s speech on Wednesday. Therefore, the price of the British pound may be volatile and has a chance to make further gains against the Euro, which has been on the weak side. The euro fell against the British pound to 0.86 and may return to the lowest level of 2023 at 0.85.
Also, today's testimony by Bank of England Governor Bailey in Parliament could be a major driver for the pound. Bailey will be able to put the market in perspective based on his assumption of multiple interest rate cuts in 2024 and may convey that dovish expectations are overdone. In fact, a tougher tone is expected, but it remains to be seen whether the market believes it and responds accordingly. Clearly, a similar situation had occurred in many areas. Central banks have been reluctant to shift to ease monetary policy and have tried to maintain a hawkish tone even when inflation declines rapidly. Shortly, the risk is that a cautious shift causes yields to collapse and allows inflation to bounce back.
Meanwhile, market movements in the US during December and the fourth quarter could serve as a warning to other banks. Historically, the Federal Reserve was the first bank to move toward easy monetary policy, which led to a rapid collapse in yields. On the other side, 10-year bond yields fell from 5% to a low of 3.67%, and this caused the price of the dollar to fall and allowed stocks to rise significantly. A dovish shift is unlikely until inflation approaches 2%, or until the economy weakens to levels that require cuts. Therefore, Friday's UK GDP is worth watching, because if it hits 0.2% or higher, Bailey and the Bank of England will feel little pressure to make hasty cuts.
On the downside for the pound, it has actually been rising slowly and is second only to the Australian dollar in terms of 3-month relative performance in the G7 currencies. Consequently, this suggests that the Bank of England has already started getting its message across and will have to be very aggressive to get a significant response. On the other hand, the British pound may be more sensitive to negative surprises in the data. Thus, weak GDP and high unemployment rates mean cuts may be necessary sooner rather than later.
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GBPUSD Expectations and Analysis Today:
According to the performance on the daily chart above, the price of the British pound against the US dollar GBP/USD still shows resistance in the face of the strength of the dollar. Technically, the stability above the 1.2760 resistance will remain a catalyst for the strength of bulls’ control. Moreover, it must be considered that stronger than expected results for US inflation will bring selling to the pair. So far, it may then move towards the support level 1.2675, the first stop for the bears to start controlling it. Furthermore, it may quickly return to the upside if the statements of the Governor of the Bank of England today are on the hawkish side. Finally, we still prefer selling GBP/USD from every rising level.
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