The British pound (GBP) is experiencing a decline in its upward momentum, influenced by political developments and fiscal worries in the UK.
Initially, the appointment of John Healy as Chancellor of the Exchequer under Prime Minister Andy Burnham was viewed positively by the markets. However, mixed signals regarding fiscal flexibility have unsettled the UK gilt markets. With the Bank of England (BoE) appearing less aggressive compared to other European banks, and with key yield support levels lower, significant financial entities expect the sterling to continue trading within a limited range.
Institutional analysis: OCBC vs. UOB
Here’s a look at how analysts from OCBC and UOB see the currency’s path forward.
- Political and financial factors: OCBC points out that Chancellor Andy Burnham’s desire to utilize “all the flexibility” allowed by fiscal rules—alongside intentions to boost defense spending and reverse sector cuts—creates some tension leading up to the autumn budget. UOB notes that recent technical shifts indicate a decline in momentum rather than active selling.
- Contrasting monetary policy: OCBC observes that while soaring energy prices may lead to interest rate hikes in Europe, the BoE seems less inclined to tighten its policies, thus diminishing the appeal of the pound.
- EUR/GBP outlook: OCBC suggests that the recent drop in EUR/GBP to a yearly low has bottomed out, predicting a recovery beyond 0.8700 in the coming months.
- Outlook for GBP/USD: UOB anticipates a short-term consolidation between 1.3385 and 1.3495, while also setting broader support levels of 1.3210 and 1.3160.
Fiscal tensions and central bank divergence upper limit for the pound
According to OCBC, the recent strength of the pound may be nearing its peak. Analysts believe that planned fiscal measures for the autumn budget will likely be modest, and balancing defense commitments without overstepping current spending regulations may prove challenging. When considering an uneven monetary policy landscape—with European countries facing increased pressure to hike rates—the pound lacks significant drivers for sustained growth.
In keeping with our view of a prolonged range for the GBP, we foresee EUR/GBP making its way back toward 0.87 in the upcoming months. While higher energy costs heighten the chances of further interest rate hikes in Europe, the Bank of England’s cautious approach suggests that any potential gains for the pound will probably be limited.
GBP/USD enters consolidation phase and technical momentum cools down
On the technical side, UOB indicates that GBP/USD is likely to hover within a range after slipping beneath the crucial support level at 1.3450. Even though there isn’t significant downward pressure, the pair appears to be settling into a clearly defined trading range.
The buildup of momentum has lost strength, leading the pound to likely trade between 1.3385 and 1.3495.
Banks expect sterling to trade in a range with downward bias
Expectations are for the British pound to continue along a range-bound path. OCBC anticipates a reversal in the recent decline of EUR/GBP, forecasting it to ascend again toward 0.8700. Meanwhile, fiscal challenges and the differing stance of the BoE weigh down on the GBP. UOB foresees GBP/USD remaining within 1.3385 and 1.3495 in the immediate term, and over the longer haul of 1-3 months, a loss of upward momentum is cautioned along with broader support levels still expected to hold at 1.3210 and 1.3160, albeit weakened in terms of testing.
