FX.co ★ GBP battered as pound sterling shields UK economy from inflation

The pound sterling is waiting out the geopolitical instability. GBP frequently dips, but recovers lost ground and rises afterwards. These fluctuations are undermining the pound, which is shielding the UK economy from inflation.

Economists are raising alarm about inflation in the UK. Rising energy prices and other factors could push inflation to 8% by the end of the year. In this scenario, the Bank of England would increase the interest rate by 25 basis points at the next three policy meetings. The interest rate would reach 1.50% by the end of 2022.

According to HSBC currency experts, the current UK government's fiscal measures to support British households are unlikely to influence the regulator's monetary policy. As a result, GBP would become the main shield against inflation for the British economy once again. The BoE is not providing good support to the UK currency.

"We believe the shadow cast by the BOE meeting over the GBP will persist in the coming weeks, especially if BOE members continue their dovish refrain," the HSBC outlook said. Monetary tightening by the Bank of England is aimed at cooling the loan market amid accelerating inflation. Economists noted that it is more advantageous for UK households to buy durable goods and take low-interest loans.

Downside risks to GBP are likely to persist in the near future. Last week, the pound sterling came under pressure and failed to rise above 1.3200. The downtrend continued early this week. However, GBP has managed to make a turnaround.

Late on Tuesday, March 29, the pound sterling increased against the US dollar and declined against the euro following reports of a breakthrough at Russian-Ukrainian peace talks. GBP/USD reached a 3-week low on Tuesday, diving to 1.3050. However, the pair quickly recovered and traded near 1.3100 afterwards. GBP/USD found support in positive net lending data for February.

GBP is likely to hit new highs in the upcoming weeks, but could dip towards new lows as well. At this moment, the pair is on the rise, but a downward reversal is still possible. GBP/USD rose sharply early on Wednesday, trying to settle in the 1.3124–1.3125 range.

Risk appetite in the global markets largely determines the pound sterling's price dynamics. Rising demand for risky assets strengthens GBP and weakens USD. Reports about a possible compromise achieved during talks between Russia and Ukraine have led to USD losing ground slightly. Furthermore, GBP found support in rising equities and strong macroeconomic data in the UK. In this situation, GBP/USD has upside potential and is attractive for investors looking to open long positions.