The second consecutive decline in retail sales in December, this time by 1%, reminded investors of bad times. It seems too early to say that the UK economy will avoid recession. Sky-high energy bills and depleted household wallets indicate that retailers are in for a tough year. This threw the pound into the murky waters of last year, when Britain was named the worst G7 economy, never fully recovering from COVID-19. The optimists, however, have not lost faith. And the retreat of GBPUSD seems to them a temporary phenomenon.
Sterling fans cannot but rejoice that the Bank of England is among those for whom the glass is half full. According to Governor Andrew Bailey, the path for the BoE in 2023 will be easier than in 2022. Inflation is showing signs of slowing down, and the economy looks more resilient than previously thought. As a result, in a favorable scenario, the cycle of tightening monetary policy can be completed earlier. Derivatives are currently seeing a rise in the repo rate from 3.5% to 4.5% by the summer, and the central bank removed the phrase in its latest accompanying statement that it does not agree with the markets.
In my opinion, Bailey is disingenuous. Unlike in the USA, where inflation expectations have fallen to 2%, UK's indicator, with a period of 1.2 and 5 years, hovers near the 4% mark, which forces the Bank of England to act aggressively. We are talking about raising the repo rate by 50 bps in February, which creates a comfortable advantage for the GBPUSD. And you can say anything you want. Softer rhetoric allows the economy to feel support from the central bank.
Dynamics of inflation expectations in Britain
Along with the decline in retail sales, consumer confidence from Gfk fell for the first time in four months. On the other hand, according to the Recruitment and Employment Confederation (REC), 184,000 new job postings were created in January, up a quarter from a year ago. According to REC, this is encouraging. At the beginning of the year, employees usually look for new positions, so an increase in job offers is good news for the economy.
The vulnerability of Britain's GDP is perhaps the main problem of the pound. On the contrary, an increase in optimism about the outlook for the global economy, an improvement in global risk appetite, and a slowdown in the Fed's monetary restriction inspire investors with confidence in the continuation of the GBPUSD upward campaign. Indeed, the latest Consensus Economics surveys show that the eurozone will avoid a recession, and JP Morgan market models indicate that the U.S. will not fall into recession either. Add to that the opening of China, and the overall picture starts to play with bright colors.
Technically, on the daily chart, the risks of winning back the double top with the GBPUSD pair look much less than the probability of restoring the upward trend. It makes sense to continue buying the pound against the U.S. dollar in the direction of the previously indicated target at 1.256.