Thanks to a 6-day rally, the British pound has solidified its leadership in the G10 currency race. Since the beginning of the year, it has strengthened by over 8% against the U.S. dollar and is trading at its highest levels since April 2022. Goldman Sachs notes that high wages and inflation in the UK, which require further tightening of monetary policy, forecast a rise in GBP/USD to 1.33 within 12 months. This is a modest estimate considering the sharp surge of the pound in the week ending July 14. However, the path upwards will be much more challenging.
G10 Currency Dynamics
If the slowdown in U.S. consumer spending to 3% triggered mass selling of the U.S. dollar on expectations of an imminent end to the rate hike cycle, the market's reaction to the release of British inflation data will be less predictable. Bloomberg experts expect a decrease in the growth rate of CPI from 8.7% to 8.2% in June, which is higher than the Bank of England's forecast of 7.9%. Formally, such dynamics in consumer prices should reduce the estimated peak of the repo rate, which currently stands at 6.5%. As a result, the pound may experience a wave of selling.
It may not necessarily strengthen if inflation remains at the same level or increases. In such a scenario, fear will return to the forex market that excessive tightening of monetary policy by Andrew Bailey and his colleagues will significantly cool the UK economy and trigger a recession. The combination of sluggish GDP growth and high prices, known as stagflation, is not the best environment for the national currency.
Moreover, the first cracks from the tightening of BoE's monetary policy are already being felt in the labor market. The number of job vacancies in the three months to June decreased by 24.4% year-on-year. The indicator is currently 26.6% lower than pre-pandemic levels in 2019, which may lead to an economic slowdown. In May, gross domestic product decreased by 0.1%, which cannot help but cause concern for the Bank of England. Monex, the most accurate forecaster of the pound in the second quarter, expects it to decline to $1.29 by the end of the year. JP Morgan expects it to peak at $1.19 by the end of December.
Dynamics of UK Job Vacancies
However, investors' aversion to the U.S. dollar and the divergence in monetary policy between the Bank of England and the Federal Reserve risk rendering these forecasts useless. The market understands well that the end of the tightening cycle of monetary policy should be accompanied by a reduction in the federal funds rate, so it sells the American currency. Derivatives predict only one act of monetary restriction by the Federal Reserve of 25 basis points to 5.5%. Meanwhile, the BoE's repo rate may increase by 150 basis points to 6.5%.
Technically, after the turbulent rally in GBP/USD, some investors decided to book profits, resulting in a decline in the pair's quotes. Nevertheless, the upward trend remains in force. Therefore, a rebound from the 1.2985–1.3015 convergence zone or a return above the 1.312 pivot point should be used to buy the pound against the U.S. dollar.