GBP/USD Forecast Below 1.30 by Standard Chartered

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The Pound to Dollar exchange rate can undergo a downside correction in the near term that would take it comfortably below 1.30, according to a new analysis from Standard Chartered.

Strategists at the global investment bank and lender say they are turning bearish on the Pound following the recent outperformance that saw GBPUSD hit levels at 1.31 last week.

"The GBP has recently outperformed following a repricing of interest rate expectations. Markets anticipate a more aggressive tightening cycle than before from the BoE given UK consumer inflation at 8.7%, the highest level among major developed economies," says Iris Yuen, Investment Strategist at Standard Chartered in London.

Comparatively, Standard Chartered believes the Federal Reserve and European Central Bank are much closer to the end of their tightening cycles as inflation declines more quickly than in the UK.

"This divergence in the monetary policy narrative is likely favouring the GBP," says Yuen.

"However, we are less optimistic in the near term," she cautions.

Above: "GBP/USD has been boosted by a rising nominal yield differential, but the pair now looks overbought and downside growth risks are rising" - Standard Chartered.

Standard Chartered reckons still-high UK inflation means real (net-of-inflation) yields remain capped despite expectations of further rate hikes.

UK inflation is due for release on Wednesday with the data forming the key event risk for Pound Sterling this week.

An undershoot in inflation could accelerate the Pound's recent pullback from 14-month highs, although we had noted in this article that an undershoot could also boost UK real yields, something Yuen suggests is a key driver of Sterling's value.

Beyond the inflation data, "downside risks to growth due to high and rising interest rates are another potential challenge. Recent job market data suggests the labour market is softening," says Yuen.

The Standard Chartered analyst says stagflation (low growth and high inflation) risk remains elevated and strategists expect the Bank of England to adopt a cautious approach to policy tightening and hike rates by less than what markets expect.

"Technically, GBP/USD looks overbought, with RSI (a momentum indicator) on the daily chart staying over 70. GBP/USD is also testing the upper limit of the long-term ascending regression channel resistance at 1.2990. Both are likely to trigger a downward correction. We expect the pair to test its near-term support at 1.2850," says Yuen.