02.11.202210:11 Forex Analysis & Reviews: GBP/USD: dollar and pound in the ring. Waiting for the last knockout?

The British currency has cheerfully started November, but experts fear that its ardor will fade in the near future. The prerequisites for this are economic instability in the UK and the long-term strengthening of the US currency, which is not going to give up its position.

Sterling ended October on a negative note, losing 1% shortly before the decisive meeting of the Federal Reserve, which will end on Wednesday, November 2. According to its results, an additional increase in the interest rate by 75 bps is expected. The implementation of such a scenario will be the first step for the Fed to slow down the pace of rate hikes starting in December 2022, economists believe.

The past month was a time of recovery for the pound, experts believe. Against this background, the GBP/USD pair gained 3%, simultaneously reaching an impressive 1.1646. In many ways, this improvement is due to the curtailment of the economic policy of Liz Truss, the former prime minister of Great Britain, and her resignation. However, it was not only the rejection of the "mini-budget" that helped GBP get out of the price hole. The expectation of positive changes in the Fed's policy played a significant role. In addition, at the end of October, the US currency weakened.

At the beginning of the last month of autumn, the pound behaved cautiously, occasionally trying to rise. On Wednesday morning, November 2, the GBP/USD pair was trading at 1.1513, significantly retreating from the previous high positions. This was facilitated by the strengthening of the greenback, which continues its victorious march in the global market.

According to currency strategists at Bank of America (BofA), in the short and medium term, the dollar will still be the leader. Analysts are confident in the dollar's dominance. However, the implementation of such a scenario can dramatically limit the recent recovery of the pound. A similar development is likely with the next increase in the Fed's interest rate, according to BofA.

By the end of 2022, the market expects an additional rise in the Fed rate (the total volume of these increases is 135 bps). At the same time, by the first quarter of 2023, the peak of the federal funds rate will be 5%, BofA is confident. The bank believes that the Fed's decision in November will provide significant support to the greenback. According to John Skeen, currency strategist at Bank of America, at the moment the US currency is at 40-year highs. At the same time, "the strength of the dollar will remain at such levels at the beginning of 2023," the expert emphasizes.

The current sterling losses are due to the release of positive macroeconomic data from the United States, which provided significant support to the greenback, but pushed the pound and the euro into the abyss. According to reports, business activity in the US manufacturing sector (PMI) soared to 50.4 points in October (against the expected 49.9 points), and the ISM business activity index in the manufacturing sector rose to 50.2 points, exceeding the projected 50 points. Before the release of the reports, the GBP lost almost 100 points, falling sharply to 1.1550. In the future, sterling lost almost all the positions won earlier and fell into a downward spiral, reaching 1.1455. Later, the British currency managed to recover, but the consequences of such a "knockout" received from the dollar seriously affected the further dynamics of the GBP.

However, UOB currency strategists remain positive about the GBP/USD pair, believing that the pound will stand until the 1.1440 level is broken. If this stronghold falls, then sterling will be in a price hole for a long time. However, this is unlikely now, the UOB emphasizes. Earlier, analysts predicted the pound's growth to 1.1700, but the chances of this are melting every day.

According to experts, in the coming weeks, the euro and the pound will remain under pressure against the USD. Nevertheless, market participants do not lose hope for the pound's recovery in the long term. Many large hedge funds have raised their bets on the pound's growth, although asset managers have reduced their short positions against the GBP. However, the majority of market participants, taking into account the positive changes in the UK fiscal policy, support the position of hedge funds. At the same time, many analysts believe that optimism about the pound is justified.