- The British pound (6B) rose more than 0.50% after hitting a 22-month low.
- The US dollar pauses the uptrend and corrects lower before the weekend.
- The Bank of England’s rate hike plan may not help the pound prevent further losses.
Over the weekend, the British pound (6B) rose half a percentage point as the pound appeared to erase some of the 2.5% losses against a strengthening dollar this week.
In particular, the dollar had a strong month, generating good gains for traders who are currently betting on one of the most promising trends in the global financial markets.
This week, a 20-year high was reached by the US dollar index, which measures the world’s reserve currency against six other currencies. On the other hand, the Euro fell to a 5-year low this week, the British pound at a 22-month low, and the Yen at a 20-year low.
There seems no apparent fundamental reason for the US dollar to fall. However, from a purely technical perspective, the pullback in the dollar ahead of the weekend was bound to happen. The British pound and other currencies are now oversold significantly.
Bank of England
As the Bank of England may not meet market expectations for a rate hike, the pound will likely continue its recent slide against the dollar. As a result, the British pound (6B) is continuing to erode, possibly below 1.20, especially if the Bank of England only plans to hike rates a few times this year, as we expect, contrary to expectations.
According to Unicredit analysts, the curve still estimates a top rate of around 2.50%. The Bank of England’s base rate is 0.75% at present. Following a 22-month low of 1.2405 on Thursday, the British pound (6B) was up 0.8% to 1.2555 on Friday.
JP Morgan’s views
This week, JP Morgan currency analysts lowered their forecasts for the British pound, citing the dollar’s continued gains as a key factor.
Mira Chandan, the FX Strategist at JP Morgan, said, “Soft growth regime and higher inflation outlook support US dollar strength.”
As a result, the investment bank increased its dollar forecasts by approximately 1.5% over the forecast period.
According to JP Morgan, a stronger dollar is expected due to the unusual situation in the US. The key reasons are the comparative performance of the US economy and its rise in interest rates.
Chandan notes that the global economic growth and inflation outlook are weak, supporting the dollar’s strength.
The bank has lowered its GBP/USD forecast for Q3 2022 to 1.27 from 1.33 and for Q1 2023 to 1.31 from previously 1.34.
In the Eurozone and UK, analysts said the downgrades were partly a reflection of stagflation.
As inflation rises, Chandan says Britain’s already questioned growth and consumption prospects are being aggravated.
British pound (6B) technical analysis:
The British pound (6B) is wobbling above the 20-period SMA (green line). The price may continue to gain higher if it finds acceptance above the 20-period SMA. The next upside target lies around 1.2785 near 50-period SMA (yellow line).
Alternatively, the price may turn to the downside toward the 22-month lows of 1.2405 area.