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The Pound to Dollar exchange rate has rallied half a percent ahead of the weekend as Sterling looks to recoup some of this week's ~2.5% losses against a surging U.S. Dollar.

The Dollar has had a particularly strong month and has delivered handsome returns to traders who have been betting on one of the strongest trends in global financial markets at present.

"The US dollar index, which measures the world’s reserve currency against a basket of six others towered at a 20-year high this week and is on track for its best month in a decade. EUR/USD plunged to a 5-year low, GBP/USD to a 22-month low and USD/JPY to a 2-decade high," says George Vessey, a currency analyst at Western Union Business Solutions.

There are no fundamental headlines or conditions to explain the pullback in the Dollar ahead of the weekend, but from a purely technical sense it was bound to happen at some point: the GBP/USD exchange rate and other Dollar pairs are now significantly oversold.

A look at the GBP/USD daily chart shows that the Relative Strength Index (RSI) has fallen far below the oversold watermark of 30:

The bottom pane in the above shows the RSI, an indicator that can give clues as to the momentum of a financial market while also signalling when the market is oversold or overbought.

Anything below 30 is oversold, and the above shows that Sterling-Dollar has not reached such oversold conditions during 2022. When it was last oversold in March a relief rally occured, but it did not mark a turn in trend.

Looking further back, the last time Pound-Dollar reached more oversold conditions was back in 2020 when markets were in full panic mode regarding the spreading Covid-19 virus.

A correction in the RSI will be inevitable: this could mean a recovery higher or simply a stalling in the down move and some ensuing days of downside action.

This does not necessarily mark an end to a down trend that has been in place for nearly a year now.

Foreign exchange analysts at JP Morgan this week downgraded their forecasts for the Pound-Dollar exchange rate, largely as a recognition that the Dollar's ongoing advance has further to run.

"The regime of softer growth-higher inflation outlook has persisted and remains supportive of USD strength," says Meera Chandan, FX Strategist at JP Morgan.

As a result the investment bank have hiked their Dollar forecasts by an average of 1.5% across the forecast horizon.

JP Morgan's expectations for a stronger Dollar rest on an exceptional U.S. economic performance relative to the rest of the world, and associated responsive rise in interest rates at the U.S. Federal Reserve.

"Global growth-inflation backdrop is still tenuous and supportive of dollar strength," says Chandan.

Above: U.S. growth exceptionalism can benefit the Dollar says JP Morgan.

Chandan notes in the past six weeks global growth forecasts have been downgraded and inflation forecasts have been upped further.

"We make significant forecast revisions to key USD pairs this month," says Chandan.

This includes: EUR/USD where third-quarter 2022's forecast is downgraded to 1.05 from 1.11 and quarter-one 2023 is downgraded to 1.10 from 1.13.

The bank's GBP/USD forecast for quarter-three 2022 is downgraded to 1.27 from 1.33 and the first quarter of 2023 forecast is down to 1.31 from 1.34 previously.

The downgrade to Euro and Sterling forecasts in part reflect growing evidence of stagflationary drags in the Eurozone and UK economies, say analysts.

Chandan says the UK's already-challenged growth and consumption outlook Is to be exacerbated by still-rising inflation.