There will be no recession! Or will there be a recession, but later? Britain's economic growth of 0.1% in the fourth quarter, thanks to the activity of fans during the World Cup, allowed the country to avoid a technical recession. Nevertheless, most Wall Street Journal experts believe that GDP will contract in the first six months of 2023, followed by a sluggish growth. The Bank of England predicts that the economy will return to pre-pandemic levels no earlier than 2026, which is five years later than in the United States. The IMF calls Britain the weakest link in the G7. How can GBPUSD not fall in such conditions?
You can try to solve problems, or you can postpone the solution in the hope that over time the difficulties will disappear by themselves. Even though the Bank of England raised the repo rate 10 times since the beginning of the monetary restriction cycle and brought it to the highest level since 2008, investors constantly felt that it is watching its back. A weak economy, which may deteriorate further due to aggressive tightening of monetary policy. As a result, the cost of borrowing in Britain rose only to 4%, and in the U.S. to 4.75%. Inflation in the United States slowed down from a peak of 9.1% to 6.5%, and in the UK, from 11.1% to 10.5%. The Fed is doing its job more efficiently than the BoE, and the latter is facing the same difficulties as before.
Dynamics of British inflation
The central bank has to strike a balance between suppressing the highest prices in 10 years and the recession of its own economy. Its indecision doesn't change the situation. Maybe they should follow the path of the Riksbank, which turned a blind eye to the recession in Sweden and accelerated the process of tightening monetary policy?
Moreover, along with high inflation in the UK, the average wage continues to grow. Bloomberg experts predicted that the figure accelerated to 6.5% in the fourth quarter. If we exclude 2021 with its recovery from the pandemic, it will be the highest value in history.
Dynamics of average wages in Britain
And the situation is unlikely to change dramatically in the near future: according to a survey by the Chartered Institute of Personnel Development (CIPD), 55% of recruiters planned to raise salaries in 2023 as they struggle to find and retain staff in a tough job market. The expected average salary has risen to 5%, the highest level since the beginning of record keeping.
Against such a backdrop, the futures market's expectation of a repo rate ceiling of 4.25%, that is only 25 bps higher than its current value, looks more than modest. With CME derivatives giving a 90% chance of a federal funds rate hike above 5%, sterling's fall against the U.S. dollar looks logical.
Technically, on the eve of important inflation releases in the U.S. and the UK, the GBPUSD pair took refuge in a consolidation in the 1.195–1.22 range. It makes sense to hold and increase short positions formed on growth to 1.2135 in the event of a breakthrough of the 1.195-1.1965 convergence zone.