The British Pound began to rise against the Dollar towards the end of 2022, driven by the expectation of a slowdown in inflation in the United States that would eventually lead to a slowdown of interest rate hikes by the Federal Reserve (Fed). The Dollar may respond to this by weakening against all other major currencies. Traders also expect the Bank of England (BoE) to continue raising its interest rates to fight high inflation. Such expectations pushed GBPUSD to 1.2450, the highest level since June 2022.
Indeed, the Fed has raised its interest rates by 25 basis points to 4.75%, slowing down from 50-75 basis point hikes in 2022. The BoE has raised its rates to 4% from 3.5%, as expected. But the unexpected part came from the rhetoric of two monetary watchdogs. The Fed has clearly indicated its intentions to continue with its aggressive interest rate hikes, while the BoE said it has almost no room to continue raising rates.
The Pound dramatically declined after the publication of Non-Farm Payrolls data in the U.S. It lost 3.5% to 1.1960 by February 7. The upside movement to 1.2260 on February 14 served as an upside correction without breaking the downside trend. Inflation in the UK is at 10.5%, but the BoE cannot raise interest rates any further without curbing investments and production, which would lead to a recession. The Gross Domestic Product (GDP) in the UK contracted by 0.3%, which shows as very weak economic performance, while GDP in the U.S. is up by 2.9%.
So, the Fed has incentives to continue raising interest rates amid a stronger economy, while rising employment and salaries are pushing up inflation. These factors could be limited by increasing borrowing costs. In contrast, the UK revealed controversial labour market data as numbers showed that the unemployment rate stood at 3.7%, while the average earnings index rose by 5.9% compared to 6.5% a month before and, missing the expected 6.2%. This could mean that inflation pressure is easing, and this is another clear reason for the BoE to retain its interest rate hikes.
January inflation figures in the United States were rather disappointing as the Consumer Price Index (CPI) was up by 6.4%, beating consensus of 6.2%. Monthly CPI added 0.5% and was in line with the forecast, but way above 0.1% a month before.
GBPUSD declined to 1.2150 on the news, indicating an inability to rise up. It could be suggested that the Cable may continue to go down until the Fed stops its interest rate hike cycle. Technical targets for GBPUSD are at 1.1960-1.2000. In case of a breakthrough, the Pound may continue down to 1.1870-1.1900. The level at 1.2270 has now became one of strong resistance.
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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