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.