The British currency is experiencing notable volatility this week, moving back and forth - from a tangible rise to a moderate decline. According to analysts, sterling has a chance to climb higher and settle on the top, but such success will be short-lived
The pound started the week with growth, but later on it partially gave up its positions. On Tuesday, November 29, the sterling noticeably strengthened against the dollar, which remains a sought-after safe haven asset for investors. Markets are currently on edge, fearing a prolonged recession in Britain. According to PMI data, economic activity in the country remains at its lowest level in 21 months, but experts are seeing some improvement.
In this backdrop, GBP/USD is experiencing significant volatility, shifting from a brief rise to a further decline. At the beginning of the week, the pair gained 45%, reaching 1.2014. Note that last week the GBP/USD pair soared to a three-month high of 1.2153. However, later on the pair lost its gains and slipped from the highs it reached. On Tuesday, November 29, the pair rolled back below 1.1950. On Wednesday morning, November 30, GBP/USD regained some of its positions and traded near 1.1957.
According to economists at ING bank, the pound will remain vulnerable until the end of 2022. Falling below 1.2000 was preceded by a noticeable strengthening of the dollar. As a result, the greenback rose substantially and the pound slumped, fearing a bleak economic outlook for Britain.
The economic uncertainty in the country is fueled by the actions of the Monetary Policy Committee of the Bank of England, which has an important decision to make. The central bank is expected to raise its key rate by 50 bps to 3.50% at its next meeting on December 15. The central bank has been raising rates since late 2021 to curb inflation and not harm the national economy. In addition, market participants are waiting for BoE Governor Andrew Bailey's speech in Parliament. It will take place in two weeks, in the middle of December.
The central bank will particularly pay attention to inflation risks, which can destabilize the British economy. According to analysts of TD Securities, they are now shifted downward. At the same time, analysts do not rule out that the BoE will continue to raise rates to 4.25%. According to preliminary projections, in December 2022 and in February 2023, the central bank will hike the rate by 50 bps, and in March next year - by 25 bpd. The realization of such a scenario will lead to achieving the final rate of 4.25%, summarized in TD Securities.
In the current situation many analysts believe that the British economy has already entered recession. Thus, economists of Danske Bank expect Great Britain's GDP to fall in the next four quarters. In this case, Danske Bank believes that the country may only experience economic growth in the fourth quarter of 2023. As a result, the unemployment rate will increase to 5%, and inflation will remain high throughout 2023.
Such a scenario would force the BoE to pursue a strategy of further rate hikes. At the same time, according to forecasts, the first reduction in the key rate will not occur before 2024. As rising inflation is increasingly hampering the British economy, the central bank has to be decisive about tightening monetary policy. However, according to Catherine Mann of the BoE's Monetary Policy Committee (MPC), the central bank "risks losing the battle to bring inflation down to the 2% target. According to Mann, now inflation can settle at 4% and stay in this range for a long time. At the same time, market participants expect the BoE to raise rates from 5.5% to the final level of 5.75% by mid-2023.
Thus, the role of sterling as a reserve currency is increasing, although further positive dynamics of GBP is doubtful. Recall that the pound accounts for 5% of global foreign exchange reserves, while the UK accounts for only 3% of global GDP. However, according to Natixis analysts, the role of GBP as a reserve currency remains in jeopardy because of the economic problems, declining investment attractiveness of the United Kingdom and deteriorating economic growth in the country.