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02.01.202323:50 Forex Analysis & Reviews: The pound walks over the abyss

It couldn't be worse. Even though the British pound has lost more than 10% of its value against the U.S. dollar in 2022, it is looking cautiously into the future. The Federal Reserve is slowing the pace of monetary tightening, but the Bank of England will go even slower. The U.S. economy is heading toward recession, but the British economy is already in it. And we don't know how long the recession will last.

Along with domestic negativity, sterling's fortunes have been and will continue to be influenced by factors from abroad. One of the important drivers of the GBPUSD peak in 2022 was the rout in the equity markets. Global stock and bond market capitalizations were down $30 trillion, with the S&P 500 losing 19% of its value and the Nasdaq Composite losing 33%. The broad stock index marked only one record close compared to the 70th in 2021. Deterioration of the global appetite for risk is an extremely negative factor for the pound, because in such conditions it is difficult for Britain to attract the necessary investments to finance the current account deficit.

The dynamics of record closes of the S&P 500

Thus, the weakness of Great Britain's economy, the slowness of the BoE and worsening global risk appetite were the main drivers of sterling's weakening in 2022, although the situation improved in the fourth quarter. This allowed the pound bulls to lick some of the wounds.

What will change in 2023? Markets continue to bet on slowing inflation and China to reopen. However, according to the head of the IMF Kristalina Georgieva, China will have a very hard time in the next few months. The impact of abandoning the "zero-Covid" policy on the economic growth of the country, the region and the world will be negative. As a result, the demand for safe haven assets will increase, which will contribute to the fall of GBPUSD.

As for U.S. inflation, the rate of decline will continue to fall amid a strong labor market. It will be difficult to achieve such a serious slowdown in consumer prices as in October-November. On the contrary, strong employment data for December will increase fears that CPI will go on to form a new peak. In such a scenario, the Fed would once again be a pronounced hawk, pushing for decisiveness, which would strengthen the U.S. dollar.

The dynamics of various assets in 2022

In the second and third quarters, the situation risks a serious change. The Fed will pause the process of tightening monetary policy, and the rapid recovery of China will seriously improve investors' appetite for risk. The pound will rise from the ashes. January-March seems to be a very difficult period for it. The consensus forecast of Bloomberg analysts concerning GBPUSD is 1.17 at the end of the first quarter, and 1.21 at the end of 2023.

Technically, on the daily chart, the pair is trading above the abyss. Its limit is located at the level of 1.2. Falling below this level will strengthen the risks of a pullback and will become the reason for opening short positions in the direction of 1.195, 1.19 and 1.182.

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Marek Petkovich,
Analytical expert of InstaSpot
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