GBP/USD is currently trading between horizontal support and resistance levels at 1.2300. Despite a rebound from a recent US Dollar decline, the pair is still trading on the backfoot. The UK’s Autumn Budget did not provide the expected bullish impact and the Bank of England is expected to continue raising rates. As a result, this currency pair has been largely overextended.
A rise in the UK unemployment rate has stoked recession fears. While the Bank of England does not see a technical recession, it is expected to ease inflation in the months ahead to ease cost of living concerns. This will likely keep the pound supported.
The UK economy is slated to slow in the final three months of the year. This may be driven by the fall in energy prices, as well as the fact that less pressure is placed on the BOE to raise interest rates. It is also possible that the Bank of England will modify its policy through more forceful monetary policy response.
With a low probability of an official recession in the near future, it is unlikely that the UK will embark on a policy adjustment. However, there are other potential factors that could change the trajectory of the currency.
One of the most significant factors that could influence the GBP/USD exchange rate is the US Federal Reserve. After the October FOMC meeting, the market is pricing in a 50bps hike at Thursday’s meeting. Although the Fed is expected to raise interest rates by a quarter point, the market is also spotting the possibility of a less aggressive monetary policy adjustment. Those fears will likely be alleviated when the Bank of England releases its interest rate decision later this week.
As the UK economy tries to navigate the complexities of a challenging economy, the Bank of England is expected to increase interest rates. Since the bank has not seen a recession since the financial crisis of 2008, it is important to keep an eye on upcoming economic data and how it will affect the currency.
Headline inflation in the United Kingdom is expected to fall from 11.1% to 10.9% in November. Energy prices could fall as well, which may help mitigate some of the drag on household income from mortgage payments. Meanwhile, the unemployment rate in the UK has risen to 3.7%. Taking into account all of these factors, the GBP/USD exchange rate is expected to stay stable.
The US dollar is now down against a basket of major currencies. The US equity futures are climbing without a clear fundamental reason. If the inflation rate in the US remains high, it will be difficult for the US dollar to overcome its recent gains.
Nevertheless, the British pound underperforms against most of its peers. In the European session, the pound is weak against the dollar and the euro. Therefore, investors are cautious today. However, the currency pair can be interesting to watch as global risk sentiment deteriorates.