The British pound failed to take advantage of the hawkish signals given by the Bank of England on August 5 and strengthen against the US dollar, after which strong US employment statistics for July pushed the GBP/USD quotes towards the target for short positions indicated in the previous article, at 1.382. Sterling is certainly strong, but in Forex, too much depends on the US dollar.
Even though only Michael Saunders voted to cut the QE program by £895 billion, and Andrew Bailey spoke at a press conference following the August MPC meeting about the temporary nature of the consumer price acceleration and the bumpy road to economic recovery in the UK, markets have long learned to read between the lines. An increase in the inflation forecast to 4% at the end of 2021 and a decrease in the threshold rate, upon reaching which the BoE would stop reinvesting the income received from the sale of bonds, from 1.5% to 0.5%, indicate that the Central Bank is ready to normalize monetary policy. According to its head, if the rate threshold remained at the same level, it would mean that the regulator will never get rid of QE.
Dynamics of the UK Asset Purchase Program
After the August MPC meeting, money markets increased the likelihood of a repo rate hike in February 2022 to 60%, and in August next year to 100%. The Bank of England will be ahead of the Fed at the start of monetary restriction, but its assumption that borrowing costs will rise to 0.5% only in late 2023 to early 2024 makes us talk about an extremely slow normalization and puts pressure on GBP/USD. If US employment continues to recover and inflation remains at elevated levels late next year, the growth rate of the federal funds rate will outpace its UK counterpart.
Dynamics of monetary restriction by the Fed, the ECB, and the Bank of England
Investors reacted rather calmly to the results of the BoE meeting, knowing full well that the release of data on the US labor market for July could turn everything upside down. And so it happened. Nonfarm employment growth of 943,000 beat Bloomberg forecasts by a mile and suggested the Fed would get rid of QE sooner rather than later. According to Dallas Fed President Robert Kaplan, the time has come to cut monetary stimulus by $10 billion a month on Treasuries and $5 billion on mortgage bonds. In this situation, the quantitative easing program will be completed within 8 months, and until the end of 2022, the Fed will have time to reflect on the fate of the rate.
Technically, the GBP/USD is trading near its fair value (1.39) as determined by the market profile. This does not allow us to assert with complete confidence that the "bears" won. On the contrary, a return of the pair above the pivot level at 1.3965 will give a signal to open longs. While the drop in quotes below the support at 1.382 is a reason to build up previously opened short positions on the pound against the US dollar.
GBP/USD, Daily chart