GBP/USD: the patient is more likely dead than alive

Selling the pound continues. The GBP/USD pair has again fallen into a perfect storm and is sinking deeper to the bottom. Yesterday it set another and, it seems, not the last anti-record this week.

A series of failures haunts the British currency. The pound did not have time to recover after a loud fall last week, when it lost almost 300 points against USD, as it was covered by a new wave of short positions.

On Monday, the pound fell against the dollar to the lowest level since mid-July at 1.1785. And on Tuesday night, the pound reached a new 2.5-year low – the mark of 1.1758.

Several factors contributed to the steep peak of the GBP/USD pair, including a large-scale rally of the dollar. However, the strongest pressure on the pound continues to be exerted by the worsening cost-of-living crisis in the UK.

Consumer concerns about the further strengthening of inflation increased significantly after the statement of the consulting company Cornwall Insight, made on Monday.

Analysts said that as early as this Friday, the British industry regulator Ofgem may announce an increase in energy prices.

According to experts, since October, the average annual electricity bills on the peninsula will grow by more than 80% – up to 3,500 pounds ($4,128.6).

In the face of this news, talk about a slowdown in economic growth in the UK has resumed again. Also, the degree of anxiety about the impending recession has increased due to another strike.

This time, employees of the country's largest container port Felixstowe are demanding higher wages. According to economists, this 8-day strike could lead to trade disruption worth more than $800 million.

Meanwhile, this is not the first large-scale protest in the United Kingdom this summer. Earlier, railway workers and bus drivers made demands for higher wages.

According to many analysts, by the end of this year and the beginning of next year, the cost of living crisis in the UK will worsen even more.

This will be facilitated by further price increases in the country. Yesterday, the American bank Citi published an updated forecast for inflation in Britain, according to which, at the beginning of 2023, the indicator will exceed the Bank of England's target level by 10 times and reach a 47-year peak of 18%.

High inflation will continue to require the BoE to take more decisive action on interest rates.

However, the central bank is unlikely to go all-in, like the US Federal Reserve, given its gloomy forecast for economic growth.

Recall that in August, the BoE raised the base interest rate by 50 bps, to 1.75%. This was the sixth increase since the end of 2021 and the largest in 27 years.

Also at its last meeting, the BoE warned that the UK would enter a protracted recession by the end of this year. Such a scenario is likely to prevent British officials from taking a more hawkish course.

Now the markets estimate the probability of a 75 bps rate hike by the BoE in September at only 13%. Most analysts expect that the indicator will be increased by 50 bps.

As for the Fed, it is also preparing to raise rates next month. At the same time, it is possible that the United States may increase the indicator by 75 bps for the third time in a row.

But even if the Fed slows down its pace of tightening, the difference in interest rates between the UK and the US will still remain quite large, which will contribute to further depreciation of the pound.

By the way, this month the GBP/USD pair has already plunged by more than 3%. Now the British currency is one of the worst in the group of ten.

The S&P Global will publish preliminary data on the UK business activity index on Tuesday. It is expected that the composite indicator will decrease from 52.1 to 51.3, which will indicate a slowdown in the growth of business activity in the private sector.

A reading below 50 may remind investors of the risk of the UK economy sliding into recession by the end of the year and put significant pressure on the pound.

Also, the pound's short-term prospects are overshadowed by the upcoming Fed symposium in Jackson Hole. Fed Chairman Jerome Powell will deliver a speech on Friday, which is the second day of the meeting.

The market expects to hear new comments on further interest rate hikes. Moreover, many traders hope that Powell will remain true to the current monetary rate.