Pound Strengthens, Rate Hike Expectations Drive Concerns

The pound reached its highest level in two weeks against the dollar, driven by expectations that the Bank of England (BoE) would raise interest rates to 6.5% early next year. This prediction also led to the yield on the two-year UK government bond reaching its highest point since June 2008.

JPMorgan voiced the belief that the BoE might need to raise rates as high as 7% from the current 5% to address inflation and achieve its 2% target. However, despite the rate hikes, consumers were benefiting from increased normal wages, which helped mitigate the impact of higher mortgage rates.

A survey showed that the growth of Britain's private sector significantly slowed in the previous month due to the impact of higher Bank of England interest rates on demand. The S&P Global/CIPS services Purchasing Managers' Index (PMI) dropped to its lowest reading since March, primarily affected by rising interest rates and concerns about the UK economic outlook. Higher interest rates were particularly affecting services related to construction and real estate.

The survey also revealed that Britain's manufacturing sector experienced a steeper decline in June, and optimism faded despite weakening price pressures. The services sector remained the main source of growth for the UK economy.

Additionally, British house building experienced the sharpest decline in over 14 years in June, primarily due to higher borrowing costs dampening demand. While input cost inflation was at its lowest level since May 2021, it still remained above pre-pandemic levels.

Revised data suggested that Britain's economy contracted slightly less than initially estimated in 2020. However, compared to other advanced economies in the Group of Seven, the UK experienced the largest decline in GDP. The first quarter of 2023 also saw British economic output 0.5% lower than in the final quarter of 2019, signaling a weaker recovery compared to other G7 economies. There were also concerns that the rate hikes could push Britain into a recession later in the year.

Public expectations for inflation in the short term increased, but long-term expectations eased, according to a survey conducted by Citi and YouGov. The Bank of England closely monitors inflation expectations and recently raised interest rates in an effort to bring inflation down to its 2% target.

Short-term inflation expectations were anticipated to be impacted the most by falling food prices, followed by a 17% drop in utility bills resulting from the government's energy price cap implemented on July 1.

Meanwhile, the U.S. dollar experienced fluctuations in response to data indicating a strong labor market, increasing the likelihood of the Federal Reserve raising interest rates. Private payrolls surged in June, while the number of Americans filing new claims for unemployment benefits rose moderately. The Institute for Supply Management (ISM) also reported faster-than-expected growth in the U.S. services sector, suggesting a resilient economy despite tighter monetary policy. Consequently, the pound has a tendency to trade within a range and exhibits a slightly lower value compared to the US dollar, primarily due to the relatively similar returns offered by both countries.

Data for Technical Analysis (5H) CFD GBP/USD

Resistance : 1.2746, 1.2748, 1.2753

Support : 1.2736, 1.2734, 1.2729                               

5H Outlook

Source: Investing.com                 

Buy/Long 1 If the support at the price range 1.2731 - 1.2736 is touched, but the support at 1.2736 cannot be broken, the TP may be set around 1.2748 and the SL around 1.2727, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2746 - 1.2751, TP may be set around 1.2760 and SL around 1.2732, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2746 - 1.2751 is touched, but the resistance 1.2746 cannot be broken, the TP may be set around 1.2736 and the SL around 1.2755, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2731 - 1.2736, TP may be set around 1.2724 and SL around 1.2750, or up to the risk appetite.       

Pivot Points Jul 07, 2023 02:24AM GMT

Sources: Investing 1, Investing 2