- The British pound has been on a sluggish path this week, recovering its previous losses to become the best performer yesterday, Tuesday.
- The GBP/USD price tried to recover to the 1.3113 level from losses that extended to the 1.3059 support level and is stable around the 1.3095 level at the time of writing the analysis ahead of important and influential US events.
- According to Forex trading, the British pound records gain on all G10 currencies, helped by the rise in stock markets, which indicates to us that the volatile global investor is responsible.
Stock markets were in the red early on Tuesday after the weak Chinese fiscal stimulus failed to materialize, with authorities doubling down on previously announced measures and introducing them. Moreover, US stock markets seem ready to ignore developments in China, and are looking forward to further interest rate cuts from the Federal Reserve, even if another 50-basis point cut is not on the cards now.
Overall, the “high beta” nature of the GBP/USD exchange rate meant that it moved away from its lows of 1.3064 at 1.31, and the GBP/EUR exchange rate recovered from 1.1898 to 1.1937. According to analysts at HSBC, “The FX market appears to be in a state of confusion… with some pockets of (undeserved) disappointment towards China but no overall ‘risk-off’ mood.”
Tuesday was supposed to be a big day for the global economy as China was set to announce billions of new dollars to boost growth in the world’s second-largest economy. However, authorities only took the opportunity to reaffirm previously announced packages aimed at stimulating growth, disappointing global markets and creating a sense of risk aversion. Moreover, markets seem to have a “half-full glass” attitude towards developments, satisfied with the significant monetary stimulus announced two weeks ago.
Pound and Bonds Raise Nerves Ahead of Budget
Despite the pound’s rise at the time of writing, it is far from its highs and may be vulnerable to further weakness in the coming days. This is with the return of UK borrowing costs to the headlines, having risen sharply in recent days, “due to investor concerns about the Labor Party government’s budget,” according to reports. Concurrently, the gap between UK and German bond yields is now the widest in over a year. Economists fear that new taxes aimed at the most productive sectors of society, namely wealth creators, businessmen, and entrepreneurs, will affect UK growth. Research suggests that some tax plans could actually cost the Treasury money, while business surveys show that Labor’s plans have frozen sentiment and risked sending the economy in the opposite direction.
In this regard, UK Chancellor Rachel Reeves is also expected to announce changes to the government’s fiscal rules to allow itself more room to borrow money. The changes are specifically aimed at opening up investment, but financial markets fear they will simply go to fund the day-to-day running of the state, which will include providing benefits and public sector wage increases.
Typically, higher bond yields boost sterling, but we are seeing a breakdown in the relationship. This suggests unease among investors.
The pound and yields diverged significantly when Liz Truss tried to pass her ill-fated “mini budget” in 2022. In this regard, Mark Dowding, chief investment officer at RBC BlueBay Asset Management, says the memory of the 2022 “mini budget” is still “etched in the psyche” of government bond investors. Decisively, the budget will loom as a potential obstacle to large pound gains in the future.
Technical forecasts for the GBP/USD pair today:
According to the performance on the daily chart below, the GBP/USD price is in a downward channel path that will be supported by a move towards the psychological support level of 1.3000, which strongly supports the bears to move to deeper support levels. On the other hand, and in the same time frame, a return to the resistance area of 1.3230 will be important for the bulls to control the trend again. Ultimately, by Considering that the reaction to the announcement of the content of the minutes of the last meeting of the US Federal Reserve and the US inflation figures will determine the fate of the closing of trading this week.
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