The British pound is tossing from side to side. It has clearly lost its benchmark, and in such a situation, investors prefer to take a break. As a result, the GBP/USD pair has fallen into consolidation and is waiting for news that will help it get out of there. What could it be? UK labor market statistics? The Jackson Hole meeting at the end of August? Or the Fed's September meeting?
We must admit that the Bank of England is behaving quite strangely. Despite the dominance of "doves" in the MPC, it reduces the threshold value of the repo rate and raises the inflation forecast to 4% by the end of 2021. According to the regulator, consumer prices will accelerate slightly above this level in early 2022, and then slow down to 2.5% at the end of next year. Everything would be fine, but the estimates of Bloomberg experts look much less "hawkish". Experts see CPI at the level of 3.3%, 3.5%, and 1.8% at the end of 2021, the first quarter of 2022, and December of next year, respectively.
UK inflation forecasts
Economists' less radical outlook than BoE suggests that the repo rate is unlikely to rise before 2023. If so, then the GBP/USD bulls could face serious problems, as current money market expectations suggest that borrowing costs will rise by August 2022. This factor is already partially included in the quotes of the pair, and disappointment is fraught with sales.
Strong UK economic data should not be misleading. Its GDP expanded by 4.8% QoQ in the second quarter, which was the best dynamic among large developed countries. However, the main driver of growth was consumer spending, which could slow down if the delta variant is actively spreading across the UK.
Dynamics of GDP in large developed countries
There are also questions about foreign trade. In June, exports to the EU rose to £14.3 billion, and imports to £19.1 billion. However, the dynamics of the indicators are torn: a sharp drop at the beginning of the year was followed by a surge, a new peak, and new growth. Companies are clearly trying to adjust to post-Brexit trading. In addition, the negative current account balance in Britain increased in June by 7.4% MoM, and the volume of freight traffic with Ireland fell by a third since Dublin prefers to send goods directly to the European Union due to problems with border checks.
The week of August 20 is very busy for the pound as per the economic calendar. Data on the labor market, inflation, retail sales, and business activity will help to understand the light in which the UK economy is, and will contribute to the growth of the volatility of GBP/USD. Of particular interest is the statistics on the average salary, which, according to forecasts of Bloomberg experts, is capable of accelerating from 7.3% to 8.6%. Such dynamics of the indicator is fraught with an earlier increase in the repo rate than the market expects.
Technically, the GBP/USD quotes are hovering close to the fair value suggested by the market profile. As a result, a consolidation range of 1.374-1.396 was formed. A fall in the pair quotes to its lower border +/- 50 pips is a reason to buy sterling, a rise to the upper +/- 50 pips is a signal to sell it.
GBP/USD, Daily chart