It is noticeable that the rebound of the price of the GBP/USD currency pair, following the announcement of weak US inflation readings, was less than usual for the pound and was not at the same level as the euro’s reaction as the nearest example. The sterling currency pair / dollar moved towards the 1.2495 resistance level, and could not move towards the 1.2525 resistance, which was recorded last week, its highest since June 2022.
According to a recent report from Deutsche Bank, the market outlook for the pound has likely been overly optimistic in recent weeks. While positive economic data and the absence of negative news helped push the pound close to its initial target of 1.25, Shreyas Gopal of Deutsche Bank warns that “most of the good news in the UK is now likely in the price.”
Despite this caution, however, Gopal notes that the risks to Deutsche Bank’s GBP/USD outlook for Q2 and Q4 remain tilted to the upside.
He notes that the pound is still cheap, which has been the case for “nearly a year now.”
The report notes that the external background and the market’s convergence with Deutsche Bank’s view that the UK’s growth outlook could be raised in line with other major economies this year means that risks to the bank’s outlook for sterling remain bullish. Investors are likely to closely watch the upcoming BoE meeting in May for any clues about the outlook for interest rates and the pound’s performance in the coming months.
The market has raised its expectations for another 25 basis point rate hike in the Bank of England to just over 70% this week in reaction to a speech by the bank’s economist Howe Bell. Bell said the bank needed to “pursue the mission” and that the “pause” was not “necessarily” communicated by the bank in its guidance in March.
Elsewhere, Deutsche Bank notes that the latest UK current account data confirms its view that the UK’s external vulnerabilities have now been greatly reduced. This is because gas prices have continued to fall and are tracking to much lower levels than this time last year. Another reason is that Britain’s focus on foreign direct investment in the energy sector means that returns outpace its peers despite the negative UK direct investment stance.
The Deutsche Bank analyst added: “The return of these profits to the pound sterling, for example for dividend payments, could be supportive.” “All the domestic good news may now be in prices,” but given the external backdrop, the risks to Deutsche Bank’s forecast (Q2: 1.25, Q4: 1.28) “remain tilted to the upside.”
Deutsche Bank likes the pound to be “long” against the US dollar and the Swedish krona.
- The price of the GBP/USD currency pair still has an opportunity to rise and approach the resistance 1.2500 confirming the bulls’ control over the trend.
- The technical indicators will not move towards overbought levels unless the bulls move in the currency pair towards the resistance levels 1.2545 and 1.2620 on straight.
- This may happen if the rest of the US economic data results are less than expected, and if the British economic growth is better than expected.
On the other hand, and over the same period of time, it broke the important support level 1.2225, for the bears to control the trend again.