It's been a long time since the pound had so much good news. The British economy most likely managed to avoid a recession in the fourth quarter, inflation is slowing down, global risk appetite is growing by leaps and bounds, including against the backdrop of the opening of China, the U.S. dollar is weakening, London and Brussels are close to a breakthrough in negotiations on the protocol on Northern Ireland as part of Brexit. What are the bulls missing on GBPUSD? Despite the wagon and the small cart of positivity, the pair is moving upward with great caution.
At the end of 2022, Britain, alongside Germany, were named the slowest-growing economies among developed countries, according to the OECD. Nevertheless, both managed to please. German GDP grew in the fourth quarter, while its British counterpart expanded by 0.1% from October to November, which also suggests that the country avoided recession. At least technically. This reduces the pressure on the Bank of England, providing an opportunity to continue the cycle of tightening monetary policy.
Dynamics and forecasts for UK GDP
Markets give a 57% chance of a 50 bps rate hike at the BoE meeting on February 2 and expect the ceiling to be just above 4%. Capital Economics believes that the cost of borrowing will rise to 4.5% over the next few months. The monetary restriction cycle started in November 2021 with 0.1%. The current repo rate is 3.5%.
A barrier to its further increase may be the slowdown in consumer prices in Britain to the 10.6% forecast by Reuters experts in December. This is lower than November's 10.7% and October's peak of 11.1%. The decline in CPI growth is likely driven by energy prices, which have returned to levels prior to the armed conflict in Ukraine, and a slowdown in core inflation. Nevertheless, the UK labor market is strong as a bull, which increases the risks of inflation fixing at elevated levels and pushes the Bank of England to take decisive action.
The rate of its monetary restriction is starting to outpace the U.S., which, coupled with a stronger-than-expected UK economy, underlies the upward trend for the GBPUSD. Moreover, the headwind from abroad was replaced by a tailwind. The opening of China can give a serious impetus to the global economy, which, against the backdrop of falling gas prices and inflation peaking, increases global risk appetite and demand for financial assets of UK issuers. The influx of capital contributes to the strengthening of the sterling.
Technically, a Wolfe Wave reversal pattern has formed on the GBPUSD weekly chart. As long as the quotes of the pair stay above the 1.206–1.216 convergence zone, formed by the pivot point and fair value, the mood remains definitely bullish. It makes sense to give preference to purchases in the direction of 1.256 and 1.291. In this regard, we keep the longs formed from 1.217 and periodically increase them on pullbacks.