When there are so many "doves" around, it is difficult to hope for "hawkish" rhetoric. The Monetary Policy Committee voted by 8 votes to 1 in favor of maintaining the previous scale of the £895 billion asset purchase program and unanimously in maintaining the base rate at 0.1%. The only aggressive MPC member left is chief economist Andy Haldane, who intends to resign soon. Investors expected that at least someone would join him. This did not happen, and the pound immediately weakened after the announcement of the results of the Bank of England meeting.
It would seem that strong UK macro statistics, a truce between London and Brussels in the "sausage war", as well as a change in the Fed's rhetoric will allow Andrew Bailey and his colleagues not only to improve forecasts, but also to signal further normalization of monetary policy. Estimates for GDP and inflation were indeed raised, but the BoE did not dare to look into the doorway opened by the Federal Reserve. The latter's "hawkish" rhetoric could help other central banks to actively fight accelerating inflation, without fearing for the strengthening of their own currencies. The Bank of England decided to wait.
The improvement in the forecast for consumer prices from 2.5% to 3% at the end of 2021 and for GDP from 4.25% to 5.5% in the second quarter was accompanied by statements that the UK economy is entering a period of a temporary jump in demand and the regulator is not going to stop its support. Money markets still expect that the base rate will be raised in the second half of 2022, which, in the context of shifting the timing of the Fed's monetary policy tightening, increases the risks of breaking the upward trend for GBP/USD.
Dynamics of inflation and forecasts of the Bank of England
The Bank of England calls the acceleration of inflation and GDP a temporary phenomenon and is well aware of the structural problems facing the economy. According to research by the Financial Times, almost a third of British companies suffered because of Brexit, and 17% were forced to stop their activities. Despite maintaining zero duties, companies face expensive inspections, increased customs control and bureaucracy, as well as occasional conflicts between London and Brussels, as in the case of the sale of chilled British meat in Northern Ireland.
It should be noted that although inflation in the UK exceeded the BoE target of 2%, it is growing significantly slower than in the United States. US consumer prices hit 5%, while the personal consumption spending index, an indicator closely monitored by the Fed, reached 3.9%. In such conditions, the strengthening of the Fed's hawkish rhetoric looks logical, as does the fall in the GBP/USD quotes.
Technically, a 1-2-3 reversal pattern was formed on the daily chart of the analyzed pair. In theory, a breakout of the trend line followed by a retest is the basis for opening shorts. In my opinion, the inability of the GBP/USD "bulls" to storm resistance at 1.3985 and 1.402 (a combination of moving averages and pivot levels) or a fall below the support at 1.3865 is a reason for selling.
GBP/USD, Daily chart