GBP/USD Hits 15-Mo Peak On UK Rate-Hike Bets, Time for Pullback?

GBP/USD PRICE, CHARTS AND ANALYSIS:

• GBP/USD hits highs not seen since April 2022

• Forecasters think UK interest rates will go well above 5%

• While the Pound looks headed higher, come consolidation may come first

The British pound rose above $1.2900 for the first time in a year in Wednesday’s Asian session, powering on to fifteen-month highs before returning some ground, as investors remain convinced that the Bank of England has perhaps more work to do than any major central bank if it’s going to contain inflation.

Clearly the day’s main inflation focus will be on the United States, from where official figures are due, but evidence of continued strong wage growth in the United Kingdom has cemented views that a fourteenth consecutive interest-rate rise from the BoE is coming in August. The Bank of England’s rate-setting Monetary Policy Committee will give its next decision on the third of that month. Indeed, bets are rising that another half-percentage-point rise could be coming, to match that imposed in June.

Consumer price inflation in the UK is running at an annualised 8.6% and, while it is below its peak, it has been above the central bank’s 2% government-set target every month since May 2021.

Goldman Sachs on Wednesday raised its forecast for the Pound against the Euro, reportedly saying that the British currency’s recent strength ‘has staying power,’ and that BoE base rates will peak at 6%, from the current 5%. The US bank has lowered its EUR/GBP forecasts to 0.85, 0.84 and 0.84 over three, six and twelve months, respectively, from 0.86, 0.87 and 0.87.

GBP/USD, meanwhile got as high as 1.2970 on Wednesday and, while it has retraced some of those gains, is still elevated.

The next major UK data release will be on Thursday in the form of official monthly Gross Domestic Product data for May.These are forecast to show falls of 0.1% on the month, and 0.7% on the year. As-expected results may give sterling bulls some pause and increase doubts that the BoE will be able to contain prices without triggering recession.

However, these numbers alone won’t shift fundamental views on sterling and any trading opportunity they provide will probably be short-lived.

GBP/USD TECHNICAL ANALYSIS

GBP/USD Daily Chart

GBP/USD has now made back almost all of the steep falls seen between April 21 and September 23 last year.

However, it hasn’t quite closed the gap back into the range seen before those falls, and bulls need to durably top 1.29583 if they’re going to get the Pound back up there. Over the medium-term it seems highly likely that they’ll be able to do this, but, unsurprisingly, GBP/USD now looks notably overbought and may need to consolidate before pushing higher.

The pair’s Relative Strength Index is now over 70, well inside overbought territory. IG Group’s own sentiment data finds well over 60% of traders net-short at current levels, a huge increase from the previous week. While this might be the time for brave contrarian traders to think about getting back in, it’s possible that better bullish entry levels could be coming up.

Pullbacks are likely to fund near-term support at mid-June’s highs in the 1.2849 area, and at 1.2595 where the pair bounced on June 29. Below that is the first Fibonnaci retracement of the rise up to current highs from the lows of last September. That comes in at 1.23450 and looks very safe from any immediate challenge.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Written by David Cottle, DailyFX