Slow and steady wins the race? If at the time of the announcement of £45bn fiscal stimulus by the Liz Truss government, the derivatives market estimated the repo rate ceiling in the current monetary tightening cycle above 6%, then it has now decreased to 4.5% by May 2023. However, in September, the pound plunged to a historic low against the US dollar, and by the end of October it recovered by 12%. Will a small move by the Bank of England in November push GBPUSD even higher?
If at the peak of the market turmoil the derivatives market believed in a giant 150 bps increase in the repo rate, then as the MPC meeting approaches, we are talking about 75 bps. The probability of such an outcome is estimated at 90%, and it should be noted that this is already so much. As a result, the cost of borrowing will rise to 3%, the highest level since 1989.
Dynamics of expectations for the REPO rate
According to Barclays, a larger move of 100 bps can be justified by a strong labor market, which accelerates inflation due to the rapid growth of wages. At the same time, 75 bps is the optimal solution, since there are no contradictions between fiscal and monetary policy in Britain now.
On the contrary, ING and Citigroup believe that BoE Governor Andrew Bailey and his colleagues are able to surprise investors by raising the repo rate by 50 bps. This will potentially further ease the pressure on the bond market after the collapse caused by unjustified tax cuts from the Liz Truss government.
In my opinion, the markets have already calmed down. The combination of Rishi Sunak as prime minister and Jeremy Hunt as Chancellor of the Exchequer is working in their favor. Britain needs foreign investment to finance its current account deficit, and the return of confidence in the government provides these flows, contributing to the growth of GBPUSD quotes.
Another thing is that the fate of the pair does not entirely depend on the BoE. The day before its verdict, the Federal Reserve will announce its decision, and a day after the MPC meeting, a report on the US labor market will be released. The +200,000 expected by Bloomberg analysts for non-agricultural employment is a very decent figure, which will indicate the resilience of the US economy to monetary tightening and will allow the Fed to continue what they started.
The position of the FOMC is of paramount importance. If it changes amid deteriorating macroeconomic statistics, the markets will smell a dovish turn, which will negatively affect the US dollar. I don't think falling Treasury yields, a weaker dollar and a rally in stocks are in the plans of Fed Chairman Jerome Powell and his colleagues. Surely the Fed will continue to talk about the determination that will support the US currency.
Technically, the 1-2-3 reversal pattern continues to be realized on the GBPUSD daily chart, which can be transformed into a Dragon. This requires consolidation. If we consider this scenario as a baseline, a decline below 1.15 is a reason for short positions, followed by longs from 1.143 and 1.139.