Analysts, in their recent analyses, have emphasized various critical factors that could significantly influence the future trajectory of the British pound. A key element in these discussions is the market's anticipation of an interest rate reduction by the Bank of England (BoE), which would mark the first decrease in this current economic cycle. This expectation stems from a broader economic context and the BoE's monetary policy trends, reflecting the central bank's response to current economic conditions.
Analysts believe that this anticipated move by the BoE could be a pivotal event affecting the pound's value, as interest rate cuts typically influence currency strength by affecting investment flows and economic activity.
The general sentiment in the financial markets has been one of approval regarding the timing of the BoE's expected rate cut. Market participants seem to agree that the BoE's move will likely follow the Federal Reserve (Fed) and the European Central Bank (ECB)'s similar actions.
This sequence of events suggests a coordinated approach among the world's major central banks in response to global economic conditions. Analysts are keenly observing this trend, as it indicates a broader monetary policy landscape and its impact on currency markets, particularly the relative positions of the British pound against other major currencies.
Another significant event that is expected to influence the pound sterling is the forthcoming budget announcement in the UK. This budget could have far-reaching implications for various economic factors such as consumer demand, inflation rates, and the overall monetary policy stance of the BoE.
These elements are critical in shaping the currency's strength, as fiscal policy decisions can affect economic growth, investor confidence, and the currency's international standing. Analysts are closely monitoring the budget details, as any significant fiscal changes could alter market expectations and the pound's valuation.
In the current market climate, there seems to be a readiness for a moderate relaxation of fiscal policy in the coming week. This anticipation indicates a general consensus among market participants that the government might implement measures to stimulate economic growth without causing significant inflationary pressures.
Such fiscal adjustments could include tax reforms, increased public spending, or other financial stimulants. The market's preparedness for this policy direction reflects a broader understanding of the need for a balanced approach to fiscal management in the current economic environment.
ING has highlighted the continued investor interest in carry trade transactions, which involve borrowing in a currency with a low-interest rate and investing in a currency with a higher yield.
This strategy is particularly relevant for the pound, as it is seen to offer relatively strong support due to its higher yield compared to other major currencies. ING's observation suggests that the pound may benefit from these investment flows, as carry trades can increase demand for the currency, potentially boosting its value. This aspect of currency market dynamics is crucial in understanding the pound's performance in the short to medium term.
Based on ING's medium-term fair value calculations, which estimate that the GBP/USD exchange rate is undervalued by approximately 7%, and considering the forecasted weakening of the dollar later this year, ING maintains a 12-month target for GBP/USD slightly above the 1.3000 mark.
This target reflects a combination of fundamental analysis and market trends, suggesting that the pound could strengthen against the dollar over the next year. This outlook is based on various factors, including economic growth prospects, interest rate differentials, and geopolitical influences that could affect both the British and American economies.
Positive developments for the pound include speculations that the UK's Chancellor of the Exchequer, Hunt, is considering introducing measures to make it more attractive for global corporations to list their shares in the UK or to encourage British investments in domestic asset markets.
While these measures might not be as extensive as the National Investment Act in the USA, which has been a significant factor in supporting the dollar, they are expected to be influential enough to merit close observation. Such initiatives could enhance London's status as a global financial center and attract foreign investment, thereby strengthening the pound.
The pound sterling is presently trading just below the middle of its two-month range, following a decline from levels around 1.2700 at the beginning of the week. The current trend in the short-term is leaning towards bearish, indicating a potential decrease in the pound's value. However, the intraday charts reveal signs of robust support if the currency were to fall to its lowest levels of 1.2600.
This technical analysis suggests that while the immediate outlook for the pound is cautious, there are underlying strengths that could prevent a significant drop in its value.
For the pound to regain strength in the spot market, it needs to overcome short-term resistance levels at 1.2680/1.2685 in the subsequent trading day. This would enable the currency to move towards the higher mid-range levels of 1.2700.
This assessment by currency experts indicates that the pound's immediate future hinges on its ability to break through these specific resistance levels, a common scenario in currency trading where breaking past certain price points can lead to a change in market sentiment and momentum.
03.03.2024
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