This week, the pound only manages to fend off the attacks of the pushing dollar and a lot of internal statistics, which aggravate its position and increase the risks of a recession in the country. At the end of the week, there was a ray of light in the form of positive retail sales, but the abundance of darkness and negativity completely overshadowed this small hope for a brighter future.
Along with an unexpected rise in retail sales, other data released on Friday showed that consumer confidence in the UK has fallen to another record low.
The consumer confidence index fell to its lowest ever level of minus 44 in August from minus 41 in July. According to forecasters, this result is due to the continued growth of inflation, the peak of which will not happen soon.
Another record inflation data was also published this week. It would seem that in such a scenario, support for the pound is provided, since it looks logical that the Bank of England will raise rates more sharply in response to inflation. However, everything is not so simple.
The Bank of England is failing to live up to ever more inflated expectations on the part of investors. The bank's management is thinking too long, like its counterparts in the eurozone, while the Fed is acting more decisively in the fight against inflation. Markets are once again raising expectations for a 75bp rate hike in September.
Traders hope that the English regulator will finally react and outperform other major central banks, including the US one. A reversal of such expectations could have extremely negative consequences for the pound. In general, the British currency will remain under pressure until the end of the year. If the Bank of England remains inactive further, there is a risk of a deeper fall in the rate.
Economists at Capital Economics believe that the Bank of England will raise rates less than what the money markets are currently taking into account, which, in turn, should keep the pound under pressure.
Comparing the UK statistics with the rest of the world shows that inflationary pressures in other countries are declining, while in the UK they are increasing and the bond markets are responding accordingly, ie rising.
Yields paid on 10-year bonds rose by about 25bp after the mid-week inflation data release. At the same time, the yield paid on two-year bonds rose by about 40bp.
Rising yields often allow the national currency to appreciate as international investors buy assets that offer higher returns. But not this time, the pound remains out of work. The heap of problems, which is only increasing, is the reason for the unwillingness of the pound to respond to rising yields.
According to analysts at Capital Economics, it is the pound that will bear the brunt of the market's disappointment.
To meet investor desires, the UK regulator needs to raise rates more than any other G10 central bank by the end of 2022.
Following the release of devastating inflation this week, money market pricing now shows investors counting on a 154bp increase by the end of the year. That's more than is required of two typically hawkish central banks and the Federal Reserve. Is it within the power of the Bank of England?
Given the expectations of market players, the three remaining meetings in September, November and December will require three increases of 50 bp, and the peak bank rate should be around 4%. This is an achievable target, as the regulator set a precedent by raising rates by 50bp in August.
The further dynamics and fate of the pound largely depends on how the Bank of England behaves. If it achieves the goal that the markets have set for it, the fall of the pound will stop. Another dovish turn in rhetoric will cause a strong collapse of the sterling rate.
Yes, investors may have gone too far, expecting the Bank of England to raise rates to almost 4.%, and, ultimately, they will have to abandon these expectations. And yet, the fate of the pound is at stake.
In the UK, inflation is forecast to peak at around 13% later this year after another round of energy price hikes. The Bank has committed itself to fighting inflation. But the fight can be different, hence the results in national currencies.
Meanwhile, higher rate expectations have not benefited the pound against the euro and the dollar to any significant extent. This suggests that the British currency did not react to this factor. Will there be any reaction? If yes, then the pound may catch up with other currencies in the coming days, closing the gap. But there should be no illusions, because there won't be any serious shifts in the recovery of the pound.
In addition, investors believe that in the UK there will be a rapid turn in policy from higher to lower rates. This will already be reflected in the pound against the dollar and the euro.
The decline of the GBP/USD pair to the level of 1.1800 is still flowers. Economists at Capital Economics predict a deeper plunge of the sterling.
Analysts at MUFG Bank also believe that the pound's drawdown will continue in the coming weeks.
«The recent build-up of long pound positions by funds could be vulnerable to liquidation, leading to a further decline in GBP/USD,» commented bank experts.
Analysts at ING also see the British currency as vulnerable to decline.
«Consumer confidence in the UK has fallen to an all-time low. At least the July retail sales brought a glimmer of hope. But that still doesn't help change the picture of the cost-of-living crisis. This is unlikely to affect expectations that the Bank of England will raise rates by 50 bp. in September,» they write.
The technical picture looks like this: the quote broke through the support level of 1.2030. It not only broke, but also fixed below the level of 1.1930, which leads to further decline with the target of 1.1800. For such a scenario, stability below the 1.2030 level is important. If it doesn't work out, the pound will bounce back up again.
Support is at 1.1875, 1.1820, 1.1720. Resistance at - 1.2030, 1.2135, 1.2190.