British Pound Forecast - GBP/USD and GBP/JPY
- GBP/USD is looking at the Federal Reserve for guidance.
- GBP/JPY jumps as the BoJ remains a dovish central bank outlier.
British Pound Outlook: Inflation Data Will Drive GBP/USD and EUR/GBP
UK Inflation took a better-than-expected turn lower in June, data showed this week, tempering expectations that the Bank of England would hike interest rates in excess of 6% this year.
The lower-than-expected release sent UK Gilt yields sharply lower, weighing on Sterling against a range of currencies. The rate-sensitive 2-year gilt currently trades at 4.93%, down from around 5.08% on Wednesday, and a high print of 5.77% made just over a week ago. The Bank of England is expected to raise rates by 25 basis points at the next meeting and by another 50 basis points over the rest of the year, leaving the terminal rate at 5.75%.
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Next week the Federal Reserve will announce its latest policy decision with the US central bank fully expected to raise interest rates by a quarter-of-a-point. This though may be the last time the Fed hikes rates as inflation in the US continues to fall. The post-decision press conference will need to be followed carefully for any clues about the Fed’s thinking for the months ahead.
GBP/USD has reversed lower over last week after making a 15-month high of 1.3143. Support for the pair is seen at 1.2742 and 1.2667 and the latter should hold any sell-off barring any unexpected hawkish surprise by Fed chair Jerome Powell.
GBP/USD Daily Price Chart – July 21, 2023
| Change in | Longs | Shorts | OI |
| Daily | -8% | 0% | -4% |
| Weekly | 64% | -31% | -6% |
Retail Traders Boost Long Positions
Retail trader data show 45.25% of traders are net-long with the ratio of traders short to long at 1.21 to 1.The number of traders net-long is 17.37% higher than yesterday and 60.85% higher than last week, while the number of traders net short is 9.87% lower than yesterday and 28.77% lower than last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBP/USD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBP/USD price trend may soon reverse lower despite the fact traders remain net short.
The Bank of Japan (BoJ) remains steadfast in its belief that the Japanese economy needs more help to boost growth and inflation. While other central banks are boosting rates, sending short-term bond yields to multi-year highs, the BoJ continues to suppress Japanese bond yields – YCC or yield curve control – with the short-end of the JGB curve held in negative territory, while the 10-year JGB currently offers a measly 0.43%.
The BoJ reiterated today that their current YCC policy was appropriate, weakening the Japanese Yen. From a technical angle, GBP/JPY has seemingly found short-term support around the 179.50 to 180.00 level and this held again today. The 20-day sma at 182.09 is being tested and a confirmed break above here would leave 184.00 as the next target. Above here, GBP/JPY would be back at levels last seen in October 2015.
GBP/JPY Daily Price Chart – July 21, 2023
What is your view on the British Pound – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.
