On Friday, the Sterling moved lower, but it remained close to its highest level against the US dollar recorded in seven months.
Investors are expecting the Bank of England (BoE) to put an end to its tightening cycle soon in light of the slowdown in the British economy.
This decision may cause some weakening in the British currency in the short term.
The data
On Tuesday, results of a survey showed that the economic activity in the British private sector had declined in January at its fastest rate recorded in two years.
As expectations of a change in the BoE monetary tightening cycle rise, some analysts believe it would result in a significant number of short-sterling positions.
The Bank of England (BoE) will have its scheduled meeting in the next week where it is expected to increase its interest rate to 4%, delivering a hike of 50 basis points.
However, the focus of the economists will be more on signals that the British central bank’s 10th straight interest rate hike could be one of the last ones.
There was a 0.25% drop in the value of the Sterling against the dollar at $1.238. On January 23rd, the currency had climbed to its highest value of $1.2447 since June 10th.
Bullish stance
There was some stability in the US dollar index, as traders were gearing up for an important week with the central banks responsible for the euro, the pound, and the greenback scheduled for their meetings.
There was a 0.2% drop in the pound against the euro, as the currency was trading at 87.95 pence per euro.
But, the medium-term stance on sterling is a tad bullish amongst analysts because they stated that the worst-case scenario for the economy in Britain had already been priced in by markets.
Analysts stated that they could be close to or have already hit ‘peak pessimism’ in terms of the British economy, which means there could be some good signs ahead for the British currency.
Reforms
It was also stated that there has been an improvement in fiscal credibility and there would be a decline in external financing concerns because global inflation was declining and market conditions were improving.
On Friday, Jeremy Hunt, the British finance minister, promised that post-Brexit reforms would be introduced for tackling the weak productivity of the UK and to boost growth.
Markets are also keeping an eye on the talks happening about the Northern Ireland Protocol and this may also work in favor of the pound.
According to analysts, there could be greater trust with better relations and this would also provide flexibility in other areas.
They said that barriers to trading with the European Union could also be removed and there may also be some improvement in what has been deemed a hard Brexit deal.
It remains unclear whether the EU and Britain can strike a deal on tweaking trade rules for Northern Ireland post-Brexit before mid-April when the region would celebrate the anniversary of the peace deal signed in 1998.
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