The British pound confidently took off, demonstrating a rise on Tuesday, June 27. However, by midweek, the explosive momentum wore off, leaving the market in confusion. Apparently, the pound bulls overestimated its strength, performing an intraday rise and lacking momentum for further growth.
Despite temporary setbacks, the sterling is trying to win back previous losses. The GBP/USD was set to close yesterday's session with the strongest growth over the last two weeks amid the recovery of investors' risk appetite. Notably, the pound appreciated against the US dollar by 0.14% to 1.2750. However, GBP resumed a downward cycle later on. On Wednesday morning, the GBP/USD pair was trading around 1.2721.
Current price movements of the pound do not provide new clues to market participants, so analysts expect the GBP/USD pair to stay in a wide price channel between 1.2685 and 1.2750 in the near future.
At present, the pound is trading in an extended consolidation range after the GBP/USD pair tested the high of 1.2850 last week but failed to break through it. The pair is significantly behind the previous high although it received support after short-term falls.
Economists at Scotiabank believe that the near-term prospects for the GBP/USD pair are quite positive. Consistent demand for the pound from investors buying GBP on minor declines around the 1.2700 mark remains bullish. The current resistance level is located around 1.2750-1.2755. In the short term, analysts expect the pair to return to the 1.2800 mark and above.
Preliminary estimates suggest that the GBP/USD pair will grow by 5.4% in the first half of 2023. A similar rise in the pair was recorded in 2017 when GBP/USD strengthened by 5.65%, as highlighted by Scotiabank.
Many market participants have increased their bets on the strengthening of the sterling amid significant improvements in sentiment towards the British currency. According to the Commodity Futures Trading Commission (CFTC), over the past week, the market sentiment has become more bullish on the pound, adding $3.2 billion. This surge has increased the number of long positions in GBP to 37,114 contracts, which demonstrates a rise in optimism for the British currency.
Since April this year, the pound has been weak but has intermittently trended upwards. Currency strategists at Scotiabank have assessed this weekly surge in GBP as impressive. This is the biggest weekly gain in the pound since March 2016.
Increased bullish sentiment points to investor hopes that the Bank of England's aggressive measures will positively impact GBP. Last week, the regulator surprised markets by raising interest rates by 50 basis points to 5%. Prior to this, the central bank had carried out a series of rate increases of 25 basis points aimed at combating inflation.
Analysts believe that the increase in interest rates and the cost of living crisis will exert pressure on the British economy and the national currency. Currently, market participants expect the base rate in the UK to remain close to 6% or higher, making it the heist rate among G10 economies.
Previously, analysts assumed that the Bank of England would cap the key rate at 5%. However, the situation can change at any time. Markets are now pricing in a final rate of 6% and above. This view is held by the majority of economists who believe the rate will peak faster than previously forecasted.
Lee Hardman, a currency strategist at MUFG, argues that interest rates will support the sterling as long as the British economy can withstand their increase. "The key question now is whether the rate increase will negatively affect the UK economy. The economy may be more resilient than expected, but sooner or later, it will show cracks under the pressure of high rates," Hardman emphasized.
According to the MUFG analyst, the GBP/USD pair may rise to the highs of 1.3000-1.3500 and then reverse when the pressure on the economy intensifies.
Christopher Wong, currency strategist at OCBC, partly agrees with this sentiment, highlighting a number of factors contributing to a positive outlook for GBP. According to the expert, the short-term and medium-term prospects for the pound are quite favorable. Wong's assessment takes into account the improved economic growth forecast in the UK, the hawkish stance of the Bank of England, the improving relations between the EU and the UK after Brexit, as well as the easing pressure on government finances, businesses, and households amid lower energy prices. These factors, coupled with a moderate weakening of the dollar and improved prospects for the British economy, create favorable conditions for the recovery of the pound.
