Today was a bad day for the British pound which tumbled against the US dollar. The downward momentum that started on Wednesday intensified to the extent that the pound quickly slipped through the support level of 1.1300. Now, bears are heading for the 1.1000 area. Will they succeed to reach it?
So far, all the factors are against the pound. Meanwhile, its American rival keeps getting support from the Fed and its hawkish rhetoric. Although comments made by the Fed Chair were vague, market participants still interpreted them in favor of the US dollar and continue to buy it.
The rate-hiking cycle in the US is likely to be prolonged. Earlier, traders expected the rate to reach its peak in March. Now, the rate is likely to move above 5% in June.
Jerome Powell made it clear that the Fed would focus on extending the period of monetary tightening rather than introducing sharp rate hikes. In other words, the regulator will be tightening the policy at a slower pace but over a longer period of time. Most likely, it will be a 50-basis-point increase. The only question is when the central bank will apply its new approach.
There are reasons to believe that the US regulator will raise the rate by 75 basis points in December for the last time. Starting in 2023, it may switch to a softer mode. There were no clear signs confirming this assumption. So, market players will have to do their best to accurately predict the actions of the Fed. If the regulator finishes this year with a 75-basis-point rate increase, GBP/USD is more likely to decline towards 1.1000 or even lower, given that the pound has enough of its own negative internal factors.
Yesterday, the British currency came under pressure after the release of the retail sales data. Retail prices surged by 6.6% in October, thus beating the forecast of 5.5%. High inflation is fuelled by the energy crisis and the lack of a qualified labor force. Employers are competing for workers and raising wages. Food prices rose the most by 11.6% while food basket costs increased by 9.4%.
Today, traders are focused on the Bank of England's policy meeting. The regulator is expected to raise the key rate by 75 basis points to 3%. Given that the economic situation in the UK has deteriorated, the central bank may ease the pace of monetary tightening because the aggressive policy will put even more pressure on the economy. In this case, the pound will depreciate further.
In the next few hours, the volatility of the British pound may rise sharply as traders are digesting the outcome of the Fed's meeting and anticipating the meeting of the Bank of England.
Notably, a moderate rise of 50 basis points in October contributed to the market turmoil caused by the budget plan proposed by Liz Truss. This time, the regulator will not repeat its mistake. Although the economic outlook is slightly better than a month ago, this does not mean anything.
It is still highly likely that the BoE will hike the rate by 50 basis points. If so, the pound may tumble today and head for new intraday lows.
"Fiscal policy is expected to be a lot tighter now than in September, so could the Bank only hike by 0.5%? If so, we could see the pound weaken following the meeting," the dealer manager at Equals Money says.
Looking ahead, HSBC says the pound is unlikely to rocket higher and some further downside could be likely from here.
"We still see some modest GBP weakness in the months ahead, but maintain a GBP/USD forecast of 1.1000 for the end of 2022 and do not think GBP/USD needs to push towards or below parity," analysts say.
Therefore, the pound will be mostly influenced by the rhetoric of the regulator rather than by the rate hike itself. Keeping this in mind, the Bank of England may not be so generous with comments today.
GBP/USD is trading very close to the key level of 1.1250. In case of a downside breakout, this level will serve as resistance. More declines are likely on the way to the levels of 1.1200 and 1.1100.
On the other hand, the area of 1.1300 acts as the first resistance level which is then followed by 1.1350 and 1.1435.