Until now the month of November has generally been a positive one for the British Pound, as it rose from 1.11 to 1.21 to the U.S. Dollar throughout this month. This week has been no exception.
The reason for this upside is related to both the Pound and the Dollar. The Cable was suddenly supported by the Purchasing Managers’ Index (PMI) data in November as the Composite PMI rose to 48.3 points, beating forecasts of 47.2 points. Any readings above 50 points indicate economic expansion, while figures lower than this threshold point to a contraction of local business. The PMI is considered to be one of the leading indicators of future economic behaviour and does not just track statistical facts.
The optimism for the Pound was supported by a weaker Dollar after the publication of the Federal Reserve’s (Fed) Minutes, where some Fed members suggested the monetary policy should be scaled backed to support the U.S. economy. As a result, the U.S. Dollar index dropped from 107 to 106 points.
However, this upside move for the Cable is not a new trend, but a strong correction to the downward trend that started in June 2021 amid tightening monetary policy by the Fed. Considering this, the Pound may have an upside limit. Macroeconomic essentials point to a weaker Pound as inflation in the United Kingdom has risen to 11.1% and has been on an upward hike since November 2021. The United States has managed to somewhat tame inflation over the past five months to bring it down to 7.7% from the peak of 9.1% in July this year. The GDP of the Commonwealth has been shown to be negative at 0.2% for the Q3 2022, while for the U.S. it was seen to be positive at 2.6% over the same period. All these factors combined are not only seen to be in favour of the U.S. in terms of the currency but could also provide the Fed with options to raise interest rates even further from the current 4% despite the current rate of the Bank of England (BoE) which is at 3%.
Consequently, the Greenback has reversed to the upside so far this week after Fed’s James Bullard said that interest rate hikes could be even more aggressive in 2023 to tame inflation. The U.S. Dollar index moved above 106 points on this news. The Dollar is also a safe haven asset that is in demand amid the energy crisis, fears of a recession, and anti-COVID protests in China.
So, an upside potential for the Pound may be limited in this regard, even if the correction would bring the Cable to the strong resistance at 1.23. Most of the factors are seen o be negative for the Pound, as it may slide towards 1.17-1.18 in the coming months.
Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.
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