04.04.202310:48 Forex Analysis & Reviews: Sterling to extend gains

The British currency has ended the first month of spring on a positive note. However, experts fear that it will be difficult for sterling to maintain its uptrend. In the short term, the British pound is likely to retain gains, but in the long run, there is a high probability of a decline.

The pound sterling has kicked off the new month with an impressive weekly gain against the US dollar. Analysts believe that the British currency has great upside potential. Thus, it is expected to continue its recovery. Sterling is also being supported by a recent rise in oil prices fueling inflation in the UK.

According to preliminary forecasts, the pound/dollar pair may edge higher in April, topping its March peak. This week, the British currency is expected to re-test its one-year high at 1.2500. The driving force behind its growth will be another rise in oil prices that raises market expectations regarding further interest rate hikes by the Bank of England.

The current situation has been complicated by a surge in oil prices caused by the OPEC+ decision. Notably, the leading oil producers intend to significantly reduce production levels. This creates the risk of another increase in interest rates by global regulators. According to Chief Market Analyst at Finalto Neil Wilson, this indicates panic among cartel members and other oil producers, so the oil producer group is trying to "create a psychological floor at $80." OPEC countries are confident that the current strategy of the Fed will provoke a hard landing in the economy. The catalyst for this step is the recent banking crisis, and the cartel is proactive, Wilson emphasized.

A timely cut in oil production is important for the pound sterling, experts say. In this situation, the British currency will hold steady. Now its dynamics are under the influence of the current BoE forecasts. Earlier, the department believed that UK inflation would be halved in 2023. However, the figure rose to 10.4% in February from the previous 10.1%. Experts assume that higher oil prices could hinder inflation cooling in the future. A further rate hike is possible only if inflation remains stable or elevated, the Bank of England warned.

The current situation is relatively favorable for the British pound, economists at Scotiabank believe. In the medium term, the GBP/USD pair is expected to trade in the range of 1.2445-1.2450. The currency was supported by recent macroeconomic data from the UK. The CIPS UK manufacturing PMI came in at 47.9 in March 2023, down from the earlier flash estimate of 48.0. Nevertheless, the pound sterling continued to trade confidently at around 1.2300, moving up from previous lows.

On Monday, April 3, sterling fell to 1.2275 but then gained ground. For now, the British pound has managed to stabilize in a short-term uptrend, according to Scotiabank. On Tuesday morning, April 4, the GBP/USD pair was trading near 1.2466.

According to experts, technical signals on the GBP chart remain bullish, which allows us to predict its further advance. Currency strategists at Scotiabank expect the pound sterling to consolidate in an uptrend. The British currency has already tested the medium-term resistance level near 1.2445-1.2450 and is currently on the rise.

As for the GBP/USD pair, the dollar remains more sensitive to risk, despite its high ability to recover. Experts fear that the greenback will plunge following data on US nonfarm payrolls for March to be published on Friday, April 7. Now the US currency reacts sharply to any changes in macroeconomic indicators. This negatively affects the pound's dynamics, analysts note. This can be attributed to the fact that the Fed decided to slow its aggressive rate-hike pace over concerns about turbulence in the banking sector. A worsening situation will lead to tighter financial conditions, that is, to more stringent lending standards. This in turn will make loans less accessible and result in slower economic growth, experts conclude.