The price of the pound sterling rebounded, while other currencies fled the dollar fund yesterday. This is after international trade data showed a decline in US demand for imported consumer goods during the month of April in a result that may be related to the monetary policy expectations of the Federal Reserve. The price of the currency pair sterling against the dollar rebounded GBP/USD from the support 1.2430 all the way to the resistance 1.2600 and is trying to stabilize above it during trading today, Wednesday. Yesterday the dollar was broadly bought, resulting in gains on almost all major currencies, although this trend was reversed somewhat after the Census Bureau released its trade balance estimate for April.

According to the announced figures, the deficit decreased from 107.7 billion dollars in March (adjusted) to 87.1 billion dollars in April, with an increase in exports and a decline in imports. The Census Bureau added that the March deficit, which was previously published, was $109.8 billion. The US trade deficit fell sharply during April due to an economically supportive increase in exports and a decrease in imports which should also boost GDP, although the data is likely to carry a pessimistic message about how far it may need to be. US interest rate to rise later this year.

Subsequent declines of the US dollar have been widespread and are more noticeable against currencies with central banks that are either in the process of raising interest rates or about to raise interest rates in order to curb their own runaway inflation rates. “Both sides of the trade ledger contributed to the improvement in trade, with exports up 3.5 percent and imports down 3.4 percent,” says Lawrence Werther, US Assistant Economist at Daiwa Capital Markets. 

“The apparent improvement in commodity trade from month to month was also evident after adjusting for price changes, with the real deficit narrowing by $19.3 billion from March to April,” the analyst added.

One explanation for the market’s response to the data may be that the decline in imports is indicative of a cooling in consumer demand for manufactured consumer goods among households, which has been an important source of inflation in the US recently and is something the Federal Reserve has openly set out to curb. For her part, Loretta Meester, President of the Federal Reserve Bank of Cleveland, told the Philadelphia Council on Business Economics last week: “The main challenge facing the US economy is unacceptably high inflation, which reflects the imbalance between strong aggregate demand and constrained aggregate supply.” “There has been strong demand in the face of very limited supply in both the product and business markets,” she added. Product markets have had to deal with a succession of disruptions in supply chains, reflecting differences in virus conditions and virus containment policies around the world.”

The Fed is seeking to use monetary policy to reduce consumer demand to a level that is in better balance with the restricted supply of goods noted above. This is is a major part of the reason why policy makers have been more hawkish in their statements over the recent months. Committed to using its inflation control tools, the FOMC is on a downward trajectory to its long-term 2% inflation target and has begun the process of monetary policy repositioning. Loretta Meester added that this recalibration reflects evolving economic conditions, the economic outlook, and the risks surrounding the outlook, and as re-calibration continues, it will continue to do so.

These types of data affect all financial markets as well as general financial conditions within the economy, conditions that have tightened significantly since June of last year and the point at which the Fed first began signaling that it would soon look to tighten its monetary policy. Another possible explanation for the import numbers and the market response to them is that the Fed is having some success in pursuit of the above target, and that financial markets have benefited from this.

According to the technical analysis of the pair: The failure of the current bounce of the GBP/USD currency pair may support the formation of the head and shoulders formation on the daily chart below. This may bring an opportunity for the bears to shoot down if the currency pair fails to gain momentum to rebound higher. To turn to the upside, it is necessary to move towards the resistance levels 1.2785 and 1.3000, respectively.

On the downside, stability below the support 1.2470 will end expectations of a rebound higher and return the pair to its broader bearish track.

The continued pace of investors’ appetite for risk and the announcement of more stimulus to the British economy, the price of the GBP/USD currency pair found the opportunity to rebound higher with gains to the 1.2666 resistance level. Yesterday, the currency pair was exposed to selling operations in light of the dollar’s ​​recovery and the movement to the level of 1.2560 and it is settling around the level of 1.2600.

After the recent performance of the pound sterling. New research from Investec finds that “pessimism in the UK macro outlook may be exaggerated” and they expect the British Pound to rebound over the coming months as a result. The global lender and financial services provider says that although they cut their forecasts for UK economic growth for 2022 and 2023, they do not believe a UK recession is inevitable.

Instead, the robust wage dynamics and savings spending collected during the Covid pandemic will provide a cushion to the economy during the “cost of living crisis.” “Some pessimism in the UK’s overall outlook may be overstated,” says Philip Shaw, chief economist at Investec in London. “The momentum in wages and employment is strong, and so is the store of high savings.”

Concerns about the UK’s economic outlook have grown in response to rising domestic inflation, largely as a result of higher energy prices. Meanwhile, UK consumer confidence slumped to record lows as GfK metrics and preliminary PMI surveys for the economy for May showed a sharp slowdown in activity and business expectations. In parallel, the GBP/USD exchange rate fell again to record a 1.0% loss for 2022 and the GBP/USD exchange rate recorded a 6.5% loss for this year.

In a regular update of the monthly economic forecast, the analyst added: “Real income will fall; And rising costs are putting pressure on companies’ margins. This is likely to affect growth.” Economists at Investec cut their GDP forecast for 2022 by 0.6 percentage point to 3.4% and their forecast for 2023 by 0.5 percentage point to 1.7%.

They expect inflation to peak at 10.3% in October and “only ease slowly from here, dropping to just under 2% in the fourth quarter of 2023”.

However, the job market is expected to remain strong with the number of job vacancies reported by the National Statistics Office now outstripping the number of people looking for work for the first time ever. This is expected by most of our economists to keep wage pressures high in the UK, which in turn poses a dilemma for the BoE’s Monetary Policy Committee: the question now. Do they keep raising interest rates in light of high inflation and strong wages, or will they stop soon in anticipation of a slowdown in growth?

The answer could determine how the pound will trade over the coming weeks and months.

Accordingly, the analyst added, “The extreme tightness in the labor market calls for more rapid price hikes at the present time.” “Because cost pressure for companies is not only due to global price fluctuations, and precisely because severe labor market tightness portends further wage increases, we consider this to leave no choice but to squeeze as the Bank of England tightens additional policy, to cool demand.

Investec now expects the bank rate to be at 1.75% by the end of the year, up from 1.0% currently. As a result and according to the analyst’s vision, “we are still looking for the pound to rise, especially against the US dollar,” and from the currency perspective, we see the most likely scenario is the pound’s recovery after its weakness since the beginning of the year. Investec expects the GBP/USD exchange rate to trade at levels of 1.30 at the end of 2022 and 1.37 at the end of 2023. Investec expects the EUR/USD exchange rate to be at 0.85 at the end of 2022 and 0.84 at the end of 2023. This translates into a forecast of GBP/EUR around 1.1764 and 1.19.

According to the technical analysis of the pair: So far and according to the performance on the daily chart, the price of the GBP/USD currency pair is still moving within an ascending channel supported by the breach of the resistance 1.2600. At the same time it still needs more momentum to move strongly upwards, and as mentioned before, it will be to break the resistance levels 1.2850 and 1.3000. It is important to strengthen the upside trend. On the other hand, according to the performance on the daily chart, moving towards the support levels 1.2470 and 1.2390 will be important for the return of the bears’ dominance, which is still the strongest in the long term.

Today, the currency pair will be affected by the announcement of the British industrial PMI reading, and from the United States the job opportunities rate and the ISM manufacturing PMI reading will be announced.

Despite the attempts of an upward correction in the price of the GBP/USD currency pair, analysts warn that the pound is set for a summer of weakness against the euro, the dollar, and other major currencies. The British economy suffers from deflation and the Bank of England abandons its cycle of raising interest rates.

Accordingly, most analysts expect the Pound to remain under pressure against the US Dollar and the GBP/USD which could lead to a test of the 1.20 level, or even a drop below it. They also say that the pound’s rally against the euro may be over by now, which means that the pound-to-euro exchange rate’s peak at 1.2188 in March was a milestone.

This leads to a crude turn of events for those hoping to sell sterling; The British currency is already recording a loss of 1.86% against the euro for 2022, while losses against the US dollar are 7.40%.

Sentiment towards the sterling took another big hit this week after data out of the UK showed economic activity deteriorated significantly in May. The S&P Global Composite PMI for May came out at 51.8, lower than expected at 56.5 and 58.2 in the previous month. Such a sharp month-to-month drop is almost unprecedented: the monthly loss of momentum in May was the fourth largest on record and surpassed anything seen before the pandemic.

Bilal Hafeez of Macro Hive says in a recent market commentary for CME Group. Fundamentals still point to sterling weakness: “High inflation, very cautious BoE and global risk aversion could see further sterling weakness”,

Data from the Office for National Statistics showed that CPI measures of inflation reached 11.1% in April and 9% on the CPI scale. Accordingly, Hafeez says: “These are among the highest rates of inflation in the developed world.” It also means that UK CPI inflation has now exceeded the US average (8.3%) for the first time since mid-2020, he says.

From a forex market perspective, the policy response between the Bank of England and the Fed is significant.

The Federal Reserve is “increasingly hawkish and ready to push the US economy into recession, while the Bank of England is moving on fears that the UK economy is slowing too much. As a result, the Fed is expected to raise rates by 100 basis points in its next two meetings in June and July, while the Bank of England is only expected to raise cumulatively by 70 basis points at its June and August meetings.”

Macro Hive expects the BoE to likely pause and reassess the situation with its updated August monetary policy report forecast. Even the European Central Bank is sending more “hawkish” signals after President Christine Lagarde warned this week that interest rates will rise in July and again in August.

“As the market reacts to Christine Lagarde’s ECB policy roadmap, it is a lot easier to see sterling as the weakest currency in Europe,” says Kit Juckes, Head of FX Research at Société Générale. The pound is now “the weakest currency in Europe,” Gokes says, adding that the market is lagging behind buying the euro and selling sterling as an “easy default” to the recent ECB policy change.

According to the latest data, UK consumer confidence is now at an all-time low according to GfK metrics, despite the tightening labor market. Moreover, other economists argue that the British economy should avoid such a disastrous outcome if employment remains strong. According to the forecast for GBP/USD, Hafeez says: “These factors together could lead to the GBP/USD pair resuming its weak trend and touching its 2019 low at 1.20 in the coming months.”

According to the technical analysis of the pair: On the daily chart below, the price of the GBP/USD currency pair is still at the beginning of breaking the descending channel. It still needs to breach the 1.3000 psychological resistance to confirm the strength of the break. The pair is still under pressure from the pessimism of the Bank of England and weak results The recent British economic data, on the other hand, the US Federal Reserve, which is more tightening, and the US data with good results support that.

The closest support levels for the Sterling Dollar today are 1.2480 and 1.2390, and the last level threatens the current bullish correction attempts. The pair will react strongly today with the announcement of the growth rate of the US economy, the number of weekly jobless claims, and the complete absence of Britain’s data.