Expectations of a cautious turn are weighing on the pound
The British pound (GBP) has been weaker against the euro (EUR) and the US dollar (USD) in recent weeks and over a period of 3 months.
There are few expectations for further rallies as the Bank of England has announced a “wait and see” approach. Moreover, the economy is showing signs of slowing down.
This week’s data may change the outlook for December as several major releases are scheduled.
Monday’s session started slowly in the absence of any market-sensitive news over the weekend. Equity markets rose slightly, with the FTSE advancing with gains of +0.65%, while the DAX gained +0.3%. Dollar pairs are generally higher, but with a small margin of between 0.1% and 0.2%. The recovery of the DXY dollar basket led to Last week to return dollar trading to the October range and could continue to rise if supported by this week’s data.
The data remains on the light side until Tuesday when the US inflation report, the most important news of the week, is released. It’s also a big week for the UK and GBP, with employment data coming out on Tuesday, followed by inflation on Wednesday and retail sales on Friday. The pound has shown some relative weakness in recent weeks allowing EUR/GBP to rise above the important 0.87 level. His 3-month performance is the second worst of the Group of Seven, second only to beleaguered yen. So this week is key to whether he can recover or continue the period of weakness he has experienced.
Most of the weakness in sterling over the past three months is due to the Bank of England’s cautious shift. Market expectations went from two more increases to none, which had a clear impact. However, this seems to have been priced for several weeks as exchange rates stabilized and weakness briefly stalled.
Sterling weakness accelerates as economic data deteriorates
The weakening of the pound in recent weeks has a new engine. To be sure, some of the data was weaker than expected and economic forecasts do not suggest that interest rate hikes are needed.
“There seems to be little independent weakness showing in the pound, although the Bank of England’s trade-weighted index has only fallen 0.6% over the past few days. ING noted on Monday that a significant 1.7% month-on-month drop in UK house prices (Rightmove) will not help sterling either.
All of this could change this week if Tuesday’s employment report shows inflationary trends. The average income index has moderated recently but remains high, and a sudden jump to the top would increase the odds of a hike in December. It is expected to rise by 7.5%.
On the other hand, the slowdown associated with another rise in the unemployment rate could exclude the rise from the table. The unemployment rate has risen steadily from a low of 3.5% in October last year and now stands at 4.2%. A rise above 4.5% would cause problems to come for the UK economy.
Inflation is also an important factor in determining whether the Bank of England will raise interest rates again, and Wednesday’s report is expected to show a significant drop from 6.7% to 4.7%. This is probably fun because of the annual comparison and low energy costs. In fact, the core CPI is expected to fall from 6.1% to 5.7%. Whichever way you view inflation in the UK, it is well above what is needed and higher than the levels we see in most other developed countries. That would at least keep the Bank of England on a tough stance.
Impact economic calendar on Forex: dollar and sterling rise
Today’s Forex market is experiencing a clear lack of uniform orientation, largely due to the absence of major economic events in the regions of Europe and North America. The Australian dollar and the pound are rebounding from their previous declines, especially in currency pairs. However, the continuation of this growth depends heavily on the release of upcoming economic data, including consumer confidence and Australian business, as well as UK employment data due tomorrow.
The dollar ranks third as one of the weakest currencies today, while the Japanese yen is seeing a slight stability after its previous sharp decline. However, the yen’s recovery is relatively limited and limited to a few selected currencies. The Japanese yen remains ready to test its lowest levels in decades against the dollar, but market participants may await the release of US CPI data tomorrow before making major trade decisions on the USD/JPY pair.
The Swiss franc is facing additional downward pressure today, as the EUR/CHF rally resumes. Similarly, the New Zealand dollar and the Canadian dollar are among the weakest performers, as they were further affected by the Australian dollar’s recovery against them. The euro presents a mixed picture, showing weakness in many pairs except for EUR/CHF.
Technically, the EUR/ GBP pair deserves some attention in this quiet session. If the pair surpasses the secondary support at 0.8715, it could indicate that the rebound from 0.8648 is complete after rejecting the resistance at 0.8752. The decline from 0.8754 will be seen as the third leg of the retracement pattern from 0.8752, with support at 0.8648 targeted again. However, should this happen, it is expected to face strong support around 0.8648. To contain the decline and resume the full rise from the level of 0.8491.
Britain’s Economic Divergence: Impact on the Pound and Economic Outlook Outlook
Based on preliminary data, the economy stagnated in the third quarter. However, it is discouraging that the bulletin was a little better, especially for the Bank of England, as this does not make its task easier at all.
The economy in Great Britain is slowing significantly. It doesn’t matter whether the post is a little more positive than expected, the outlook is obviously bumpy.
Since the most important data is due to be published this week in the form of the labor market report (Tuesday) and inflation data (Wednesday), things are likely to remain volatile for sterling.
UK 10-year government bond yields fell 3 basis points to 4.31%, away from the session’s peak of 4.363%, while the FTSE 100 rose 0.6% to trade near an intraday high. The cabinet reshuffle is an internal political issue that is unlikely to have a shift in the finance ministry, so for sterling, the outlook is really about the dollar.
Sterling interest is likely to be limited as concerns grow about the UK’s economic downturn. GBP/USD found support below 1.2200 on Friday and traded near 1.2240 on Monday while GBP/AUD traded at a two-week high of 1.9245. As far as the ECB is concerned, markets expect a 68% chance of a rate cut in April and a 100% chance of a cut in June.
Over the weekend, ECB President Lagarde stated that there will be no interest rate cuts for at least the next two quarters.
Bearish pressures on GBP/USD: medium crosses andnegativeMACD signals
At the moment, the GBP/USD is trading in a downtrend during the US session. The pair is trading at $1.2299, and the chart shows weakness in most moving averages crosses. The MACD indicator also indicates a negative trend indicating a weakness in selling power.