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Summary: The GBPUSD exchange rate has been the top-performing currency among the G10 currencies this year, with the potential for further appreciation in the next 12 months.

Fundamentals

Bank of England (BoE) Governor Andrew Bailey, speaking at the European Central Bank meeting held in Sintra, Portugal, on Wednesday, stated that the BoE's rate hike last week was a response to the resilient UK economy and unexpectedly persistent inflation. The impact of a one-time 50 basis points rate hike would be more effective than two consecutive 25 basis points hikes.

"In our view, long-term data, particularly labor market data and the inflation data we have at our disposal, indicate clear signs of sustained momentum in the UK. These signs lead us to believe that we need to take very strong measures to tame the persistent inflation in the UK."

The BoE appears to be more focused on following the trajectory of inflation rather than actively combating it with an accommodative monetary policy, which could be detrimental to the pound. However, central bank officials at both the European Central Bank and the Bank of England are not yet convinced that inflation is consistently returning to target levels, and therefore, further rate hikes are possible. Similar economic outlooks between the UK and the Eurozone in the future could be beneficial for currency stability.

Undoubtedly, the GBPUSD exchange rate has been the top-performing currency among the G10 currencies this year, and the expectation of further appreciation in the future remains attractive to investors. Additionally, the recent decisive measures taken by the Bank of England to curb inflation should support the GBPUSD exchange rate.

While the Fed may potentially hike rates in July, a rate cut could occur by the end of 2023 or early 2024. Lower U.S. interest rates would help pave the way for a weaker U.S. dollar in the future.

Furthermore, the Sonia curve reflects a peak UK interest rate of 6.15%-6.20%, currently at 5.0%, with the possibility of a 50 basis points rate hike in August. Future data may oppose such aggressive action, but most BoE officials are unlikely to strongly suppress market expectations. This implies that GBPUSD does not have significant downside potential, but further upside movement may be very gradual. We anticipate GBPUSD to rise from its current levels to 1.3000 by September of this year and potentially further appreciate in the next 12 months.

Technical Analysis

GBPUSD edged slightly higher on Wednesday, closing near 1.2634. Bulls attempted to push prices higher on Thursday, but the technical outlook remains weak, raising doubts about whether there is enough strength to drive an upward movement. However, on the positive side, the price is still operating within our established upward channel, albeit with a slow trajectory.

Additionally, the MACD has crossed below the 0-axis, and although the RSI remains above the neutral level of 50, it has fallen below previous highs, indicating a weakening of buying interest.

In terms of trend signals, the price has paused below the May high, temporarily halting the recent bearish correction, and remains above its moving averages, maintaining a bullish structure in the medium to long term. That being said, the price seems to be hovering within a descending triangle in the four-hour chart, which is typically a bearish pattern. However, the absence of a break below the upward channel adds further uncertainty to the market.

Indeed, as mentioned earlier, most BoE officials are unlikely to strongly suppress market expectations. This implies that further upward movement may be very slow. However, a decisive extension by the bulls above 1.2740 would reduce downside risks and propel a rebound toward the key resistance zone of 1.2820-1.2880, where the historical support-turned-resistance trendline from 2022 is located. A breakthrough in this range could potentially drive the currency pair to the psychological level of 1.3000.

On the other hand, a correction to the lower dynamic channel could test the uptrend once again. If the bears significantly break below that channel, it could lead to a decline toward the 1.2560-1.2530 range. Failure to hold that level could further drive the price down to the 1.2420 level.

Overall, despite recent weakness, GBPUSD remains within a cautious upward channel. As long as the channel is not breached and higher lows are formed, it favors the bulls. In terms of trading strategy, buying the dips is recommended.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.2630

Target Price: 1.3000

Stop Loss: 1.2420

Valid Until: 2023-07-13 23:55:00

Support: 1.2600, 1.2578, 1.2530, 1.2514

Resistance: 1.2684, 1.2720, 1.2735, 1.2759