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24.01.2023 03:00 PM
GBP/USD: brief results and near-term outlook

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As follows from the joint report published today by the Chartered Institute of Procurement & Supply of Great Britain with S&P Global, the preliminary index (PMI) of business activity in the country's services sector in January came out with a value of 48.0, significantly lower than the forecast and the previous value of 49.9.

Although UK manufacturing PMI suddenly improved in January to 46.7 from the forecast of 45.0 and the previous value of 45.3, it was not a supportive factor for the pound. It fell sharply after the publication of the report. The service sector employs most of the UK's working-age population and accounts for about 75% of GDP. The most important part of the services sector is still financial services.

GBP/USD momentarily lost almost 70 pips to 1.2308 and is still declining, trading near the 1.2300 support level as of writing.

The published data once again reminded of the difficult situation in the British economy, which is developing against the backdrop of high energy prices and interruptions in their supplies, the consequences of Brexit, Russia's ongoing special military operation in Ukraine, which threatens to escalate into a full-scale conflict with the West, whose integral and one of the most aggressive in this situation in relation to Russia is Great Britain, and growing inflation in the country. At the same time, decisive actions are expected from the Bank of England to curb inflation, but there are none.

Given the gloomy outlook for the British economy, the Bank of England is likely to act cautiously, taking a wait-and-see approach more often than an aggressive one to high inflation. Economists predict an imminent economic downturn and recession in Britain. In this regard, they believe that the Bank of England will soften its monetary policy next year to support the economy, despite high inflation. Note that the situation for the British central bank is almost stalemate.

Against the backdrop of the weakness of the U.S. dollar, the GBP/USD pair was able to correct into the medium-term bull market zone, rising above 1.2130, 1.2240, through which important support levels pass. Nevertheless, below the key resistance levels 1.2750 and 1.2900, the long-term and global downward trend persists, making short positions preferable. A consecutive breakout of support levels 1.2130, 1.2065, 1.2020 will return the GBP/USD pair to the long-term bear market zone.

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Meanwhile, after the release the European and British PMIs this morning, market participants are getting ready for the publication (at 14:45 GMT) of similar indicators for the United States.

Likewise, a slowdown and a decline in indicators is expected, which is below the value of 50, separating the growth of business activity from its slowdown. This is a negative factor for the dollar. However, there are also likely to be surprises. If the S&P Global report with data on the services and manufacturing sectors of the U.S. economy turns out to be more positive, this will give the dollar additional support today. Although, it is also likely to be short-term. In general, the downward dynamics of the dollar and its DXY index prevails, steadily declining towards the psychologically significant mark of 100.00.

Last week, a number of Fed officials spoke in favor of a more restrained approach to the pace of monetary tightening in response to evidence of a further slowdown in U.S. inflation. Now market participants are waiting for the Fed to raise the rate at its January 31 and February 1 meeting by 0.25%. This contributes to strengthening the positions of the main competitors of the dollar in the foreign exchange market. However, with regard to the pound, as we noted above, the situation is somewhat different due to the prevailing circumstances and economic conditions.

Tomorrow (at 07:00 GMT), the latest statistics on industrial inflation in the UK will be published. The core producer price index is expected to rise in December from 0.5% to 1.1% and to 13.9% in annual terms (from 13.3% a month earlier), once again pointing to the rapidly growing inflation in the country, outpacing other major economies in the world.

Jurij Tolin,
Analytical expert of InstaForex
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