The British Pound is trading on either side of 1.2100 against the US dollar, buoyed by better-than-expected data this week. While the US dollar is also strong, supported by rising US Treasury yields, Sterling is making gains against its counterpart across the Atlantic and a wide range of other G7 currencies. The latest UK PMIs beat forecasts and showed business activity in the UK, especially in the services sector, picking up sharply in February, while the latest look at the government books showed public sector net borrowing (PSNB) boosted by better-than-expected tax receipts and in surplus in January.
The latest data suggest that the UK economy may be improving, giving the Bank of England more wiggle room to increase interest rates. UK inflation is on the way down, but at a current level of 10.1% is sharply higher than the Bank of England’s (BoE) mandate of around 2%. Inflation is expected to fall quickly over the coming months, according to the BoE, as energy prices and the cost of imported goods fall, while the UK consumer has less disposable income to spend on goods and services. The UK central bank is seen hiking rates by 25 basis points at the March meeting to 4.25%, and by another 25 basis points in Q2. If growth continues and inflation falls in line with the BoE’s expectations, there may be a case for a UK rate cut in Q4.
The US dollar has been the main driver of cable over the past few months as the greenback pushes higher due to a series of aggressive rate hikes in the US. The US dollar index is less than 40 pips away from making a fresh multi-week high as US yields continue their recent rally on a hawkish US central bank backdrop.
US Dollar Index (DXY) Daily Chart – February 22, 2023
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The daily GBP/USD chart shows the pair trapped between the 20-, 50-, and 200-day moving averages and in neither overbought nor oversold territory. The recent double-top around 1.2450 is unlikely to be tested in the near future with 1.2270s and 1.2290s providing resistance. The 200-dma at 1.1934 should act as a brake in the case of any sell-off.
GBP/USD Daily Price Chart – February 22, 2023