The British pound is recovering after two days of significant sell-offs triggered by the release of data on U.S. inflation. GBP/USD quotes returned to the area of 7-month lows following the unexpected acceleration of consumer prices in the United States. The markets have once again been dominated by the idea of a resumption of the Federal Reserve's monetary policy tightening cycle, which has strengthened the U.S. dollar. How will the pound respond?
When central banks shift to data dependency, a data-rich economic calendar provides traders working with GBP/USD ample information for consideration. Bloomberg experts anticipate a slowdown in average wages in the United Kingdom from 8.5% to 8.3%, consumer prices from 6.7% to 6.6%, and core inflation from 6.2% to 6%. Such dynamics would enable the Bank of England to extend its pause in the monetary restriction cycle in November, keeping the repo rate at 5.25%.
At the same time, Bank of England Chief Economist Huw Pill has warned investors not to overreact to new data. The regulator will not make decisions based on one or two reports; it needs to understand the trend. The fact that a significant portion of monetary restriction has not yet affected the economy of the United Kingdom forces the central bank to adopt a cautious approach.
Dynamics of the British Economy
The United Kingdom is in an extremely challenging position. According to Chancellor Jeremy Hunt, the situation is worse than in the spring because rising interest rates are leading to a revaluation of long-term debt. The Governor of the Bank of England believes that the final mile in the battle against inflation will be the most difficult. Indeed, the IMF forecasts very slow GDP growth at +0.5% in 2023 and +0.6% in 2024. The short-term market has lowered the assumed ceiling of the repo rate from 6.25% in mid-summer to 5.5%. Moreover, further inflation deceleration will make derivatives believe in the end of the monetary restriction cycle, which is bad for the pound.
However, Britain's problems are only one side of the coin. In reality, the most significant contribution to the decline in GBP/USD quotes came from the rapid rally in U.S. Treasury yields. According to Wall Street Journal experts, it has increased the likelihood of a recession in the U.S. economy, which will ultimately reverse the trend. Specialists predict a drop in yields on 10-year bonds to 4.47% by the end of 2023 and to 4.16% by mid-2024. If this all comes to pass, the downward trend in the analyzed pair will shift to an upward trend. However, it is too early to talk about that.
Technically, on the daily GBP/USD chart, a reversal pattern 1-2-3 could be formed. To activate it, a break above resistance at 1.2245 is required. If it occurs, we will start buying the pound. However, as long as the pair remains below the fair value at 1.221, the emphasis should be on selling.