FX.co ★ GBP/USD: Stagflation scares the pound

The specter of stagflation continues to haunt Britain. The Bank of England predicts that consumer prices will remain above 4% in the second quarter of 2022, and hints at a gradual tightening of monetary policy while leading indicators indicate a serious slowdown in GDP. Low economic growth and high inflation. In such an unfavorable environment, fans of the pound have to act.

Frightened by the return of COVID-19, upcoming tax hikes, accelerating prices, and depleting fiscal stimulus, consumers are starting to spend less, affecting GDP. According to GfK research, consumer confidence in Britain saw the fastest decline since October 2020. If you add to this the slowdown in business activity to the March lows, as well as the approach of the manufacturing PMI to the critical level of 50, it becomes clear that the economy is slowing down.

Dynamics of consumer confidence in Britain

Business dynamics in Britain

In such a situation, even the "hawkish" hints of the BoE do not become a catalyst for the strengthening of the sterling against the major world currencies. At the September meeting, two members of the Monetary Policy Committee voted to end QE, while officials unanimously said that a repo rate hike could occur before the end of the quantitative easing program. BoE believes that inflation at 4% and above will remain in April-June next year, however, argues that an immediate tightening of monetary policy is not required. It should be smooth and gradual.

This apparently hawkish rhetoric has allowed money markets to increase the number of alleged monetary restrictions from one (in May 2022) to two (in May and December). Then the first increase in the repo rate moved to November of the current year altogether. Many investors believe that the next meeting of the MPC will be very lively. However, they are in no hurry to buy the pound. Especially against the US dollar, which looks very strong at the end of September in light of the potential QE tapering.

The pound is under pressure from the confusion with Evergrande and the US debt ceiling. Both events can end in defaults. In the first case, the infection can spread to the entire Chinese economy and significantly slow it down. In the second, the consequences can be much worse. According to Jerome Powell, there is no need to think that the Fed or anyone else will save the economy and financial markets from turmoil. Sterling is sensitive to changing global risk appetite as the UK, which has a substantial current account surplus, needs to fund it. And it's best done when local assets are sold out like hot cakes.

Technically, GBP/USD bears are trying to build an impenetrable fortress around 1.358-1.36 using the Triple Bottom pattern. However, there is no guarantee that it will stop the sellers. The signal for the formation of short positions is the breakout of the lower border of the inside bar near 1.3655.

GBP/USD, Daily chart