The British Pound suffered over the last month when it plunged 7% from 1.3112 below the 1.2200 level. However, the Greenback is responsible for most of this dive. It has been heavily rising across the market since the Federal Reserve (Fed) began to tighten its monetary policy and increasing interest rates. Geopolitical, inflationary, and stagflation risks usually draw investors towards the safe haven U.S. Dollar.
The U.S. Dollar index (DXY) that measures the currency basket of the Dollar against six major currencies, rose from 99.8 points to 104.4 points over the last month, or by 4.6%. This is by 2.6% less than the decline of the Cable. So, it did decline further after the Bank of England (BoE) forecasted inflation up to 10.2% in 2022 from the current 7%, while GDP is estimated to be down by 0.25% in 2023.
However, recent data for the Q1 2022 published on May 12 shows that GDP rose by 8.7%, which is far above 6.6% a quarter before, but lower than 9.0% forecasted by analysts. Current figures may ease the decision for the BoE to raise interest rates as there seem to be lower risks of recession, and potentially the monetary regulator may have to raise rates as much as the Fed, or even more.
So, the Pound has the upside potential during the correction. Technically, the strong support is at the current level of 1.2200, a low since June 2020, when the Pound quickly bounced back. So, a possible correction to 1.2500-1.2600 may be considered if the Cable passes the 1.2400 resistance level.
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