At the start of the week, the British currency keeps rising, extending its rally that began earlier. Bulls are trying to mitigate the risks caused by the unstable economic situation in the UK. They are slowly but surely pushing the pair to new highs. Analysts believe that the pound sterling is likely to climb higher given the current situation in the stock market.
At the end of last week, the pound sterling grew significantly versus the US dollar. Its growth was fueled by the release of the UK retail sales report, which showed a new surge. Retail sales increased by 0.6% on a monthly basis, exceeding previous forecasts. At the same time, in late October, inflation in the UK accelerated to a 4-decade high of 11.1% from the previous figure of 10.1%. The October figure is the highest since October 1981. Back then, the indicator totaled 11.2%.
On November 18, the British currency received a powerful driver but failed to take full advantage of it. A bit later, it also declined lower. It made an attempt to consolidate at the current highs. Analysts suppose that inflation is highly likely to approach new highs which may lead to a protracted recession.
However, the recent uptick in inflation is bullish for the pound sterling as it may force the Bank of England to tighten its monetary policy. The pound sterling is projected to climb against the US dollar amid such expectations. Market optimism and its current rally also stimulate further growth of the sterling. Over the past two weeks, it has gained 4.6% versus the greenback as traders were pinning hopes on a pause in the Fed's tightening cycle at the start of 2023.
Currently, the sterling retains a bullish bias although analysts warn that the rally may end soon. Analysts at UOB Group reckon that the GBP/USD pair is likely to move in the wide range between 1.1790 and 1.1950. At the same time, they expect to pair to get stuck in the range of 1.1820–1.1940. On November 21, the GBP/USD pair was trading near 1.1805, trying to rise higher. Last Friday, the pound sterling managed to reach new highs amid increased risk appetite.
Judging by the technical indicators, the pair is projected to remain below the key 200-day moving average located near 1.2200. It indicates the continuation of a long-term downward trend. Over the past 10 days, the pound sterling has grown by 6% amid the weakening US currency.
Downside risks for GBP will increase if the economic situation in the country worsens. However, it has stabilized now. The pound sterling maintains a rally thanks to positive sentiment in stock markets and the British government's commitment to ensure the stability of the financial system.
Hence, analysts are betting on a further recovery of the pound sterling despite the gloomy economic prospects of the UK. Another reason for a rally could be improved trade relations between the United Kingdom and the United States as well as an increase in risk appetite. Thomas Flury, UBS FX Strategy, assumes that the main risk for GBP is the worsening economic conditions in the UK.
Economic reports, which are on tap on November 23, will definitely impact the further trajectory of the pound sterling. According to preliminary estimates, in November, the PMI Manufacturing Index amounted to 45.6. In October, the reading was 46.2. The PMI Services PMI is expected to come in at 48 versus the October figure of 48.8. As for the Composite PMI Index, it is projected to total 47.5 versus the October indicator of 48.2.
FX strategists at Credit Agricole contemplate that the pound sterling is still between a rock and a hard place as there is a risk of new signs of a recession in the country. This is why the PMI Indices are highly likely to provide more clues about the current state of the economy.
Besides, the upcoming reports will hardly bring any unpleasant surprises that could trigger a drop in the pounds sterling. Analysts are sure that this week will be more or less stable for markets. In the short term, the pound sterling is likely to maintain its bullish bias. However, there is a risk of a drop in case of a recovery in the US dollar. The pessimistic forecast of ING bank suggests a fall in the pair to 1.1500 and below this level by the end of 2022. It undermines the overall positive outlook.
