An approach to the end of the interest rate cycle puts pressure on the British pound

07 September 2023 130
An approach to the end of the interest rate cycle puts pressure on the British pound

GBPUSD has been near lows since the beginning of the summer. The British pound is following the dollar index. Such dynamics is associated with the deterioration of the US Federal Reserve rate forecast. There are also new risks of inflationary pressure due to the recent rise in oil prices.

 

According to analysts, rates in the US will remain high until the end of the year. At the same time, the decreasing probability of recession in the US in 2023 supports the dollar.

Meanwhile, markets are waiting for new comments on the US monetary policy and the results of the Fed meetings which are going to be held on September 19 and 20. According to analysts' assumptions, the regulator may keep rates unchanged due to signs of weakening economic activity.

On the other hand, the Fed may maintain its hawkish strategy, as inflation remains high and the market remains resilient. This turn of events would support the US dollar and weaken all other currencies.

 

The Bank of England is "much nearer" to ending its run of interest rates increases, said Governor Andrew Bailey. This year, inflation is likely to decline further. Thus, the central bank could end the tightening cycle this year.

Following these statements, the pound fell to a three-month low. Investors lowered bets on further rate hikes.

Inflation was in double digits at the start of the year but has now fallen to 6.8%. Indicators are signaling that the fall in inflation will continue.

More recent data tracking purchasing managers' sentiment and retail sales showed unexpected weakness. Surveys found that businesses and consumers are feeling growing stress over higher interest rates.

 

Most likely, the weakness in the UK economy, rather than falling inflation, is prompting the regulator to announce the end of the tightening cycle. Soft signals from the Bank of England are putting pressure on the British pound.

 

According to the technical analysis, the GBPUSD currency pair is accelerating its downward movement. Earlier, the neckline level in the head and shoulders pattern was broken. Technically and fundamentally, the decline may continue.

The downside target will be the consolidation level of this year’s spring, which corresponds to the price of 1.235. A Stop-loss should be placed at the return to the neckline level of 1.260.

 

Decrease in the GBPUSD currency pair:

Take profit — 1.235

Stop-loss — 1.260

This content is for informational purposes only and is not intended to be investing advice.

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