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GBPUSD: "Reignited" Dollar Selling Could Continue to Drive Pound to New Highs

Forex MarketInflation and Recession
Summary:

During the Asian session, the GBPUSD attracts some buying on dips around the 1.2025 range and pushes the price up to a new daily high during the European session. The currency pair is currently trading around 1.2100, pretty close to the highest level hit last week (since Aug. 12).

Buy GBPUSD
End Time
CLOSED

1.20620

ENTRY PRICE

1.23200

TGT PRICE

1.17000

SL PRICE

1.23982 +0.00071 +0.05%

817

Points

Profit

1.17000

SL PRICE

1.21437

CLOSING

1.20620

ENTRY PRICE

1.23200

TGT PRICE

Fundamentals

As the month comes to a close, the GBPUSD has had an excellent performance in November, gaining 5.3%; the sharp rise in the exchange rate is impressive, but it is more due to a sharp fall in the dollar rather than a new strength in the pound. Nonetheless, there is still room for the GBPUSD to rise further in its upward movement.
Admittedly, the UK economy is likely to fall into recession, with the outlook as gloomy as a rainy day in London in November. The PMIs for manufacturing and services remained in the negative range in October, suggesting the economy is contracting. The labor market has been a bright spot, but that could change soon. It is expected that the Bank of England (BoE) will double the unemployment rate to 6.5%. The U.K. economy fell by 0.2 % in the third quarter, and the BoE warned that negative growth will continue through the first half of 2024. With these strong economic headwinds, it is difficult to justify a continued rise in the pound.
The market interprets this as the pound seems "very likely" to fall further. And the coming recession may have a "serious" impact on UK society. As a result of Brexit, de-globalization, and the impact of the pandemic, the UK's terms of trade have been hit harder than other developed economies. Such a deterioration would put pressure on the already widening current account deficit and could push up inflation, making it more difficult for policymakers to control the growth of inflation. The BoE's efforts to curb inflation have led the economy into recession more severely than in other economies, which could have serious social repercussions.
Inflation has reached a staggering 11.1% despite the BoE raising its cash rate to 3.0%. The Bank stepped up its rate hike at its last meeting, raising rates by 75 basis points. The BoE interest rate is expected to peak at 5 percent, which means more tightening measures. The bank will have to proceed cautiously so as not to stifle economic growth as it continues to tighten to curb the "blazing" inflation.
Meanwhile, last week's Fed meeting minutes reiterated the message the Fed has been sending for weeks; that is, interest rates are being lowered. Fed members agreed that there will be smaller rate increases "soon" as they continue to assess the impact of current policy on the economy. The members also noted that inflation has not yet shown any signs of peaking. The market is not entirely convinced that we will see lower interest rates at the December meeting - there is a 65 % chance of a 75-basis point rate cut and a 35 % chance of a 50-basis point rate hike.
The recent decline in the dollar has played a large role in the recovery of the GBPUSD exchange rate. With some funds buying the dips on the pound at the September lows, (funds could leave at any time due to the current high prices) investors may remain relatively cautious, which could support the currency pair in the near term. This week's U.S. inflation data will be key to the GBPUSD movement, with further cooling inflation likely to prompt the Fed to raise rates slightly in December, while rising inflation could lead to a larger rate hike.
GBPUSD: "Reignited" Dollar Selling Could Continue to Drive Pound to New Highs_1

Technical Analysis

The GBPUSD held on to its gains after the UK PPI retraced upwards in October. As the currency pair approaches the August high of 1.2270, the bearish RSI divergence is a warning signal that bulls are running out of momentum. Profit-taking may be expected in this major supply area, while those with a bearish view in the medium term may seek to sell. However, a further bullish breakout could pave the way for a (downward) reversal. If the GBPUSD fails to break the 1.2270 level and starts to move lower, then 1.2020 will be the first support level and 1.1900 the second.
Overall, despite the impending exhaustion of bulls' momentum, more "reignited" dollar selling may push the pound to new highs. It is recommended to mainly buy the dips.

Trading Recommendations

Trading direction: Long
Entry price: 1.2096
Target price: 1.2320
Stop loss: 1.1700
Deadline: 2022-12-12 23:55:00
Support: 1.2040/1.1900/1.1875
Resistance: 1.2153/1.2192/1.2357
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Eva Chen

Analyst

Master of Economics, 8 years in the financial industry, CFA holder, joined HSBC (Hong Kong) Bank in 2013 after graduating from the University of California, USA in the Investment Research and Markets Department. With years of financial market experience and trading experience, having provided excellent investment advice to many brokerages, entity derivatives importers and clients in Greater China.

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