- The Pound Sterling is relinquishing some of its recent gains against both the Euro and the US Dollar.
- We believe that technical factors, weaker equity markets, and end-of-quarter flows are contributing to this trend.
- According to reliable trading platforms, the GBP/EUR exchange rate is currently well below its Tuesday high of 1.2024, experiencing a 0.33% decline today to 1.1959.
- Similarly, the GBP/USD pair reached a peak of 1.3429 yesterday but has since dropped by 0.26% to 1.3330.
According to Forex trading, the recent rise in the pound has meant that it has reached overbought conditions against both the euro and the US dollar, with the Relative Strength Index (RSI) readings on the daily charts crossing the 70 level. The RSI rarely spends time above 70 (which is overbought) or below 30 (which is oversold) and the RSI is usually expected to return to the mean once these extremes are reached.
A period of neutrality or decline in the exchange rate will therefore bring the RSI back into balance, and we are seeing this in mid-week trading.
However, there is no news to support the pound’s decline and, in this regard, analyst Brad W. Bechtel, an analyst at investment bank Jefferies, said that Wednesday is expected to see end-of-month and quarter flows that will lead to volatility in the forex markets. He said: “We are at the end of the quarter this week and that is likely to start to drive the forex market more in the London morning and New York morning.”
The end of the quarter and month are approaching, which will require global portfolio managers to adjust recent developments in the foreign exchange market. Rebalancing could lead to significant volatility in the near term. “The turbulent third quarter for asset prices opens the door to a significant rebalancing at the end of the quarter,” said Robert Vollem, a Reuters market analyst. Bechtel believes that the end of September and the third quarter of 2024 could be characterized by a stronger US dollar given the weakness seen in recent weeks. “I would be surprised if we end up selling enough US dollars at the end of the quarter to push us through the 100 supports in the US dollar index,” it said. “In general, quarter-ends have been positive for the US dollar, so if anything, we are likely to return above 101 towards 102.”
The recovery in the US dollar index (DXY) – a measure of the overall performance of the US dollar – means that GBP/USD is under pressure again and the current appreciation trend could extend for six days.
Global equity markets are also weaker on Wednesday, which would typically impact the high beta pairs of GBP/USD, GBP/CHF and to some extent GBP/EUR.
Overall, the combination of overbought conditions, end-of-quarter flows and weaker markets are all conspiring against sterling. However, in the medium term, the same factors that have pushed sterling to recent highs remain in place, namely the Bank of England, which will only cut interest rates cautiously due to UK service sector inflation amid continued economic growth. In its latest World Economic Outlook, the OECD said the UK economy is on track to expand by 1.1% this year, up 0.7 percentage points from its last forecast in May.
The UK was among a group of countries that recorded “strong” growth rates this year, she said, having rebounded strongly from a mild recession at the end of 2023.
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Technical forecasts for the GBP/USD pair today:
There are also no major concerns about global stock markets, and the weakness should be short-lived now that the Federal Reserve has begun its easing cycle, which could help the pound. The GBP/USD price will be affected today by the announcement of the US economic growth reading, along with the number of weekly jobless claims and US durable goods orders, in addition to the most important statements from a number of US central bank policy officials led by Jerome Powell.
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