The GBP/USD pair is trying to climb for the second consecutive day. Although the rise is more symbolic, what's important is the context of Bank of Governor Andrew Bailey's speech. He could well have sunk the British currency, but he gave quite an eloquent speech during the hearings in the UK Parliament. Speaking before the Treasury Committee, Bailey maintained balance in his rhetoric, and the market interpreted this in favor of the pound. This is a highly debatable conclusion, but the fact remains: the pound stayed afloat after the crucial test.
First of all, I want to remind you that ahead of Bailey's speech in the House of Commons, the UK released several economic data. According to the reports, the unadjusted claimant count was 1.58 million in January 2024, which was 14,000 more than the month before, while the annual growth in regular earnings slowed down, as did the Consumer Price Index (annual inflation fell to its lowest level since January 2023). The British economy also disappointed: the country's GDP contracted by 0.3% QoQ and 0.2% YoY in the fourth quarter. The UK economy entered a technical recession, joining Japan in the G7 club.
Given this "preview", the market was eagerly waiting for Bailey's speech, hoping to hear specific details regarding the prospects of the interest rate cut. Following the results of the February meeting, Bailey vaguely voiced his vision of the situation, saying that the central bank has moved from the question of how restrictive the policy should be to the question of how long the central bank should maintain it. This phrase was said before the aforementioned economic data were released, so traders had high hopes for Bailey's speech.
But - no! Bailey's behavior reminded us of Mario Draghi. Back when he was the head of the European Central Bank, Draghi often puzzled the markets with his vague words.
Thus, commenting on further steps in terms of monetary policy, Bailey said it is "not unreasonable" for the markets to expect interest rate cuts this year. However, he noted that inflation does not need to fall to its 2% target before policymakers back an interest-rate cut.
In other words, "so yes, so no". It could be interpreted both in favor and against the British currency, considering the ambiguity of the BoE. Members of the British Parliament tried to find out what he meant. But these attempts were unsuccessful: Bailey refrained from giving any hints about the timing of monetary easing. He only reiterated the thesis that, in general, the market is correct in depicting a curve according to which the BoE will lower the interest rate throughout 2024.
Take note that there is no unanimous opinion regarding the further prospects of monetary easing. According to a Reuters Jan. 17-22 poll, a little more than half, or 38 of 70 economists said the first cut would come next quarter. The rest believe that the BoE may push the rate cut until the end of summer or even autumn. J.P.Morgan analysts voiced a similar forecast - it expects the BoE to start cutting interest rates in August 2024.
Therefore, trying to "decode" Baileys rhetoric with the help of market forecasts will not yield a definitive answer. Unfortunately.
What did Bailey say? Essentially - nothing. But the fact that he consistently avoided saying specific words also says something. At least that the BoE is not ready to publicly announce monetary easing and tie its actions to any time frame. At the same time, the central bank acknowledges that it is ready to take such a step within the framework of 2024. In other words, the central bank did not confine itself to time frames, although it confirmed its dovish intentions.
The market interpreted Bailey's speech in favor of the pound, but in my opinion, it is a hasty, or rather, emotional decision. The head of the BoE did not live up to the dovish expectations, but at the same time, his rhetoric cannot be called hawkish.
Therefore, one should treat the current GBP/USD growth with great caution: the castle built by buyers for the pair is like a "sandcastle" that can collapse at any moment, as there are no solid grounds for the British currency's growth (on a stable basis). The pound will only rise if the greenback shows weakness, which, in turn, is frozen in place awaiting the Federal Reserve's minutes, U.S. reports, and speeches by Fed representatives (Jefferson, Harker, Cook, Kashkari, Waller), who will express their opinions on Thursday and Friday.
Given the high degree of uncertainty, it is advisable to maintain a wait-and-see position on the GBP/USD pair - buying looks unreliable, and selling is too risky, at least for today.