- The GBP/USD currency pair has seen increased losses since the start of this week, extending its decline to the support level of 1.2662, its lowest in over a month.
- The British pound has also lost ground against other major currencies. Simultaneously, Investors are anticipating faster interest rate cuts from the Bank of England.
- This decline comes amid fears of a US recession, which has also caused UK government bond yields to fall to multi-month lows.
In general, financial markets now expect a quarter-point rate cut by the Bank of England by December. Interest rate futures on Monday pointed to a total of 56 basis points of cuts this year, compared to 47 basis points expected on Friday. In addition, two-year government bond yields, which reflect changes in borrowing costs, fell 8 basis points to 3.526%, the lowest since April 2023. Last week, the Bank of England cut its benchmark interest rate from a 16-year high of 5.25% to 5.0%, its first cut since 2020.
Overall, the British pound has shed much of its recent gains against other major currencies in line with declining interest rate expectations, despite Governor Andrew Bailey and Chief Economist Huw Pill saying last week that further interest rate cuts are likely to be several months away. Consequently, the July inflation data, to be released next Wednesday, will not go too far in determining the timing of the next cut, as the Bank of England expects inflation to rise again, to 2.75% by the end of the year, and says it will not respond to any single month of data surprises.
This is likely to rule out a rate cut in September in most circumstances.
Analysts at MUFG Bank said in research briefing at the beginning of the week: "The UK interest rate market has since moved to price in more easing, which has also been encouraged by rising concerns about global growth and sharp selloffs in global equity markets. Furthermore, the UK interest rate market has moved to price in further 50 basis points of cuts by November." They also said: "A further cut in September has been judged unlikely given that last week's decision was very close (5-4 votes in favor of the cut and some members who voted in favor of the cut indicated that their decision was finely balanced), but external developments could pressure the Bank of England to cut rates again sooner."
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Technical forecasts for the GBP/USD pair today:
According to the daily chart attached, the GBP/USD bearish move is gaining strength and its losses on the cusp of 1.2600 support are moving technical indicators towards strong oversold levels. On the other hand, and in the same time frame, a return to the resistance area of 1.2830 will be important for the bulls to regain control. So far, the general trend is bearish. The currency pair will continue to be influenced by central bank signals, investor sentiment, and financial markets, which have recently experienced sharp setbacks.
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