GBP/USD interbank has pushed through the 1.3000 barrier, trading at a 15 Month High.

For the fourth consecutive day, the USD has sustained a downward trend when compared to other prominent currencies. This ongoing decline follows the release of the most recent inflation report.

In June, the US Consumer Price Index (CPI) witnessed a decline to 3% year-over-year, down from May's 4%. Although slightly below the market's anticipated figure of 3.1%, this drop reveals a moderation in inflation. Additionally, the core CPI, which excludes the volatile costs of food and energy, decreased from 5.3% to 4.8%. 

As a result, traders are now speculating that the Federal Reserve's tightening cycle may conclude earlier than initially predicted.

Could the recent developments in the United States potentially bring an end to the GBP's strong performance as the best-performing major currency in 2023? GBP's rally has been driven by elevated expectations of the Bank of England's Bank Rate and rising yields. However, certain factors may impact this trend.

The decrease in UK yields suggests that the anticipated peak in the Bank of England's Bank Rate could be lower than previously expected, which, in turn, exerts downward pressure on UK bond yields.

Nevertheless, it is premature to determine whether the GBP's rally against the EUR & USD has reached its conclusion. Much will depend on the upcoming release of UK inflation data next week. A significant undershoot of market expectations in this data release could deflate UK rate expectations and impact the GBP's performance.

Currently, the UK maintains a considerable bond yield advantage over the Eurozone, indicating that the GBP/EUR exchange rate may remain elevated in the coming weeks. However, breaking the recent highs near 1.1750 might present a challenge in the near term. 

Consolidation above GBP/USD 1.30 will likely open a higher trading range for GBP against the USD.

Currency markets were relatively calm last week due to a US bank holiday, allowing central bank policies to take center stage. A new member of the Bank of England committee expressed a hawkish view, supporting the idea of further interest rate increases and the potential for an extended period of higher rates. However, finding the right balance between curbing inflation and avoiding long-term damage to the housing market and the overall economy poses a significant challenge.

Market expectations continue to reflect a Bank rate above 6% by the end of the year, with a strong likelihood of a 0.50% hike in August. UK government bonds are trading at their highest levels since 2007. The focus remains on inflation and the tight job market, with upcoming data on employment figures next week and an inflation report the following week.

In the United States, minutes from the recent central bank meeting indicate that despite last month's pause, the Federal Reserve is still likely to raise rates by 0.25% this month, although it may be the peak depending on economic data. Today's attention will be on the payroll numbers, while next week brings the latest inflation report, with a projected decrease in the headline figure to 3%.

Regarding the European Central Bank, market forecasts anticipate two more rate hikes, including a 0.25% increase later this month, as the focus remains on the inflation outlook.

In the currency exchanges, there is a lack of strong conviction or clear trend amid the highly uncertain backdrop. The demand for the British pound remains robust due to the expectation of higher interest rates. However, the established short-term trading ranges of 1.2500 - 1.3000 against the US dollar and 1.1500 - 1.1750 against the Euro continue to be significant factors.

According to the latest data from the foreign exchange markets, speculative investors are displaying the highest level of optimism towards Pound Sterling since before the Brexit vote, indicating a bullish sentiment.

The Commodity Futures Trading Commission (CFTC) reports that speculative investors increased their net number of 'long' contracts on the British Pound by an additional 5,000 to reach 52,000 in the final week of June.

Jane Foley, Senior FX Strategist at Rabobank, notes that speculators' net GBP longs are now at their highest level since July 2014.

However, the CFTC's Commitment of Traders Report suggests a slight slowdown in the Pound's net buying momentum compared to the previous week when investors positioned themselves ahead of the Bank of England's interest rate decision, which resulted in a larger-than-expected 50 basis point hike.

Interestingly, despite the increased bullish sentiment towards the Pound, its value actually declined following the Bank of England's decision and throughout the start of the new month.

Filip Carlsson, Quantitative Strategist at SEB, suggests that the Pound's movements after the rate hike could be interpreted as a 'buy-the-rumor/sell-the-fact' trade.

Looking ahead, if this view holds true, we may see the trends that were prevalent before the decision resurface, leading to further upside for the GBP.

However, it is important to be cautious about the bullish sentiment surrounding Sterling. The higher the net long position grows, the greater the risk of a significant currency decline due to a 'washout' in positioning.

Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole, warns that the GBP, in particular, could be vulnerable to profit-taking as market long positions become overstretched.

Jane Foley of Rabobank believes that the Pound's potential for upside movement will be limited by concerns over rising interest rates at the Bank of England, which could exacerbate the UK's economic growth risks.

Rabobank anticipates weak economic growth, high inflation, significant national debt, and concerns about investment growth in the coming months.

However, Foley points out that the drop in the UK's current account deficit as a percentage of GDP could provide some protection for the Pound, potentially resulting in less volatility if recession fears intensify.

Rabobank's forecast for Pound Sterling by the end of the year is a slightly softer performance against the Euro, with an estimated exchange rate of approximately EUR/GBP 0.87, translating to a Pound to Euro exchange rate of around 1.15.

Regarding the Pound to Dollar exchange rate, the outlook depends primarily on the direction of the USD. Foley suggests that the currency pair will struggle to surpass recent highs, and Rabobank expects it to end the second half of the year lower, in the region of GBP/USD 1.22.

Despite potential challenges, the Pound starts the second half of the year on a positive note. Foreign exchange strategists believe that the UK currency could continue to benefit from elevated interest rates in July.

International investors seeking higher yields are attracted to UK two-year bond yields, which remain near their highest level since 2008. This interest in UK assets helps explain why the Pound outperformed other G10 currencies during the first half of 2023, as noted by Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Ltd.

Goldman Sachs foreign exchange analyst Michael Cahill suggests that the Pound should outperform due to the need for higher real interest rates.

Barclays' weekly currency research report also takes a positive stance on the Pound, as they expect elevated UK interest rates to drive global investor demand for UK assets. Barclays specifically highlights a more positive outlook for the Pound to Euro exchange rate.

The Bank of England is facing mounting challenges after a recent rate increase. Market predictions indicate that interest rates could reach over 6% early next year, with a higher probability of an additional 0.50% hike at the August meeting.

The housing market is displaying increasing signs of strain, as high interest rates and the rising cost of living dampen demand. This situation has significant implications for the broader UK economy, which is particularly sensitive to interest rate changes.

The Bank must strike a delicate balance by raising interest rates sufficiently to control inflation without jeopardizing the long-term economic prospects.

During the Sintra forum, global central bank leaders have consistently reiterated a hawkish stance on monetary policy. Inflation and tight labor markets remain key concerns.

The US central bank governor, Powell, has indicated the possibility of two more rate hikes, dependent on data, with another increase highly likely next month, following a pause this month.

The European Central Bank also continues to signal that two additional rate hikes may be necessary, as the focus remains on the inflation outlook.

Despite the expectation of higher interest rates, the pound sterling has weakened over the past week. The market is more concerned about deteriorating growth prospects. GBP/USD remains volatile within the range of 1.2500 – 1.3000, while the key levels to watch for GBP/EUR are 1.1500 – 1.1750.