The reevaluation of the chances of tightening the monetary policy by the Bank of England, coupled with American exceptionalism, has pushed GBP/USD quotes down for the eighth consecutive week. The pound is losing its advantage against the U.S. dollar. While it had grown by more than 8% since the beginning of the year by mid-July, this figure has halved at the start of September. However, Reuters experts expect that sterling will be trading at $1.29 in 12 months.
If in the midst of summer, the futures market expected a rise in the repo rate to 6.5%, this figure has now dropped to 5.6% in early autumn. Derivatives predict one or two more acts of monetary restriction, with the chances of it happening in September estimated at 73%. Interestingly, Bank of England officials are trying to convince investors that the cycle of monetary restriction has already ended. Chief economist Huw Pill compared it to a mountain with a plateau at the top. If rates are held there for too long, inflation will slow to 2% by 2025. What's the point of tightening monetary policy further?
Dynamics of GBP/USD and repo rate expectations
Bank of England Governor Andrew Bailey went even further. In his speech to Parliament, he stated that borrowing costs in Britain are at the peak of the cycle, and the full economic impact of their increase has not yet been felt in the UK economy. There is confidence that consumer prices will continue to decline by the end of the year. The last statement is reassuring to Rishi Sunak's government, which predicts that inflation will end 2023 at 5.3%, half the maximum of 10.7%. Thus, the Prime Minister's promise to cut prices in half will be fulfilled.
In this regard, the survey results of British companies provide cause for optimism for both the Bank of England and the Cabinet. According to the August consensus estimate of business leaders, the cost of production will increase by 4.9% in 12 months, which is 0.5 percentage points lower than expected in July. Not to mention last year's September peak of 6.6%. Wage growth rates will fall to 5.1%, with the maximum reached at the end of 2022, standing at 6%.
Dynamics of expected wage growth rates in Britain
The reevaluation of repo rate prospects is not the sole reason for the decline of GBP/USD. The global economy is feeling somewhat unstable. Global trade is suffering. In such conditions, currencies of countries with a high share of exports in GDP are under significant pressure. Moreover, the pound is a pro-cyclical currency unit. Strengthening it requires an improvement in global risk appetite and positive developments in the global economy.
Let's not forget about the risks of accelerating American inflation in August, which will strengthen the position of the U.S. dollar against major competitors.
Technically, on the GBP/USD daily chart, breaking through the resistance at 1.2535 may trigger a correction within the framework of profit-taking by speculators on shorts. In such conditions, it is advisable to transition from short-term purchases to sales on rebounds from resistance levels at 1.2600, 1.2625, and 1.2685.