The UK currency has begun the new week on a positive note and moved upwards. Analysts note that the pound sterling would face many obstacles, but GBP is ready to hit new highs.
On Monday, December 12, the pound sterling was stable against the US dollar. However, the weak potential for economic growth in the UK somewhat spoiled the support provided by positive macroeconomic data for October. According to analysts, the next meeting of the Bank of England, which will be held on Thursday, December 15, will be decisive for the pound and the country's monetary policy.
This week, the British regulator will announce its decision on the interest rate. The BoE may hike the rate by 50 basis points to 3.5%. Analysts at Danske Bank believe the regulator will return to a slower pace of rate hikes in the near future. The Bank of England's balanced fiscal policy has brought the economy back to a relatively stable state it had before the mini-budget was announced. Therefore, the regulator may pause its cycle of rate hikes, analysts said.
The British currency has regained certain balance after the recent slight shock. According to economists from Commerzbank, the pound sterling declined somewhat due to the tense situation in the UK economy. Experts believe that the UK will lag behind the EU in the long term. This has negatively affected the performance of GBP in the short and medium term.
Nevertheless, the pound remains resilient and is making steady progress toward new highs, despite the current headwinds. GBP found support in positive GDP data. According to the Office for National Statistics (ONS), the UK economy expanded by 0.5% month-on-month in October, after falling by 0.6% in September. GDP growth was largely driven by the service sector, which added 0.6% in October.
According to analysts, the positive effect of strong UK GDP data on the pound sterling was short-lived. However, GBP managed to take advantage of the situation and entered an upward spiral. GBP/USD gained some momentum and rose to a new daily high of 1.2300. The pair retreated somewhat afterwards, but didn't lose its upwards momentum. On Tuesday morning, December 13, GBP/USD hovered near 1.2283, making steady progress towards new highs.
Economists at Scotiabank place the pair's short-term support near 1.2220. If the pound sterling advances into the 1.2340-1.2350 range, it will get a powerful bullish impulse. At the beginning of this week, the pound was stable thanks to several positive macroeconomic data releases, with its next target being the highs near 1.2345.
Many experts are worried that the British economy will face recession in 2023, after the country's GDP has shrunk by 0.3%. However, the final GDP data exceeded market expectations. The manufacturing sector has advanced as well – monthly output rose by 0.7% in October from zero growth in September 2022.
However, despite this positive outlook, there is a risk of a drop in UK GDP in the fourth quarter of this year due to galloping inflation, rising interest rates, supply chain disruptions and tight labor market conditions. According to analysts at NIESR, these factors weigh down on businesses and manufacturing in the UK. At the same time, they are quite optimistic about the GDP growth rate - they expect it to stabilize in the fourth quarter of 2022.
