FX.co ★ Is the pound's growth temporary?

Many analysts are asking questions: how long will the pound's growth last? Or will it decline soon? Specialists are worried about sharp changes in the dynamics of the British currency, which can undermine its position.

The pound was growing steadily this week, impressing the markets. It is rising due to impressive UK macro statistics and expectations of positive changes in the interest rate. Experts assume that the Bank of England will raise the key rate following its leading counterparts, such as the Fed and the ECB.

A strong impulse for the pound's growth was the sudden acceleration of annual inflation in the UK. According to the reports of the Bureau for National Statistics, British inflation reached 5.5% last month, from the previous 5.4%. In the first month of 2022, consumer prices in the country fell by 0.1% after rising by 0.5% in December. Economists said that UK's inflation reached a 30-year high, slightly behind another world record – US inflation, which spiraled to a 40-year increase.

A significant increase in UK consumer prices contributed to the strengthening of the national currency. Against this background, expectations of an early rate hike by the Bank of England have increased. The overall positive mood contributed to the rise of the pound, although experts fear that the upward trend will end soon.

The current situation helped the GBP/USD pair to rise. The pound took the opportunity and tried to consolidate its gained positions. According to UOB currency strategists, the pair needs to break through the resistance of 1.3645 for further growth. The probability of the pound rising above the level of 1.3645 is still insignificant, but the chances will increase if the pound does not go beyond the level of 1.3520 in the coming days. The UOB notes that the next resistance level for the GBP/USD pair is set around 1.3680.

Analysts' comments are right – the pound is far from the indicated level of 1.3645. On Friday morning, the GBP/USD pair was trading at 1.3610, trying to rise higher, but with mixed success. A day earlier, the pound increased by 0.25%, reporting to the level of 1.3616. Analysts say the pair will remain in the wide range of 1.3550-1.3650 in the near term, in which it is located after a significant deviation from the "bearish" trend in December 2021.

The future economic prospects of the UK are as vague as the weather in the country, especially given the possible fiscal increase. The pound will remain in a fighting mood in the coming weeks, as market participants are confident in the upcoming tightening of the monetary policy by the Bank of England. It can be recalled that the regulator has raised interest rates twice since December 2021 (to 0.5% from the previous 0.1%). Now, the markets expect a further rise in the key rate in March up to 0.75% or immediately up to 1%.

Many analysts consider the pound undervalued by 10% relative to the US dollar. According to experts, this situation developed after the Brexit referendum in 2016 and continues to this day. Experts believe that this undervaluation hinders economic growth in the country. At the same time, the short-term prospects for the pound are quite optimistic and set investors in a positive mood.