- The Pound Sterling is maintaining positive momentum thanks to constructive market sentiment and contrasting speeches delivered by global central bank governors, particularly Andrew Bailey and Jerome Powell last Friday.
- However, we believe that further outperformance will be more subdued in the near term.
- GBP/USD gains have reached the resistance level of 1.3265, the pair's highest level in two years, and is stabilizing around it at the beginning of trading today, Wednesday.
According to reliable trading companies’ platforms, the pound received help from the Governor of the Bank of England, Andrew Bailey, who said that it is “too early to declare victory” over inflation, confirming market bets that the bank will ignore another interest rate cut in September. In general, both the European Central Bank and the US Federal Reserve are expected to cut interest rates in September, with more cuts likely from both before the end of the year. In contrast, the Bank of England appears set to deliver just one more cut before the end of the year. This suggests a slower path for cuts from the BoE, providing a key source of support for the pound against both the euro and the US dollar.
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Technical forecasts for the GPB/USD pair today:
Overall, the constructive global market sentiment remains the other main driver behind the Pound Sterling's recent outperformance. The jump in equity markets on Friday pushed the British currency to new highs against the dollar while also boosting its recovery against the euro. According to forex trading, the GBP/EUR exchange rate rose above 1.18, while the GBP/USD pair reached above the resistance of 1.32. When examined over a one-week period, the Pound Sterling is the best-performing currency among G10 currencies and remains the best performer for 2024.
Certainly, financial markets gave up some of the recent gains on Monday, weakening the Pound Sterling's advance, especially against the US dollar. Losses were concentrated in the US technology sector, which showed tension ahead of the mid-week Nvidia results announcement. Much depends on the performance of the leading artificial intelligence company, and any disappointments could lead to a broader decline in the technology sector. Therefore, disappointment here could strengthen the US dollar from its recent levels, but we do not see this significantly affecting Pound Sterling prices. Furthermore, declines in the GBP/USD pair are likely to be superficial as long as the markets believe that the Federal Reserve is ready to deliver several US interest rate cuts in the coming months.
Fed Chairman Jerome Powell said in a speech at Jackson Hole, “It is time to adjust policy… Downside risks to employment have increased… We do not seek or welcome further easing in labor market conditions,” .
Obviously, this showed that the president is now less concerned about inflation and his focus is shifting to the labor market, where he fears a slowdown in the economy could lead to higher unemployment. This would require a US rate cut and raise market expectations for a 50bp rate hike by the Fed in September, although the odds of this receded somewhat on Monday, helping the US dollar recover somewhat.
San Francisco Fed President Mary Daly reiterated the message on Monday, saying: “It is time to adjust policy.”
Looking ahead, we expect sterling to be more subdued, with GBP/USD likely to be capped at 1.32 resistance in the near term. Also, we note that the exchange rate has become overbought in the near term and some pullback is necessary. The losses in GBP/USD on Monday, linked to the US tech sector sell-off, suggest that the broader market pullback will only temporarily weigh on the British currency.
Concurrently, GBP/EUR is advancing for a fifth consecutive day, which is unusual for this exchange rate. The GBP/EUR pair is moving slowly with a tendency to return to the mean, and the pair could also decline if global markets face a setback. In general, we will be watching the inflation data from the Eurozone this week (Germany on Thursday and the whole Eurozone on Friday). Any decline in these data could strengthen expectations of a rate cut by the European Central Bank, which in turn could weigh on the Euro.
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