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GBP/USD maintains bullish momentum despite negative fundamental background
June 19, 2023 1:22 pmVideo
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UK inflation is declining much slower than in the United States and the eurozone. This indicates poor performance by Andrew Bailey and his colleagues and undermines trust in the country’s central bank. According to an Ipsos survey, 34% of respondents stated that they are dissatisfied or very dissatisfied with the activity of the Bank of England, while 21% are satisfied or partially satisfied. The 13% difference turned out to be the largest since the beginning of recording in 1999. However, the stones thrown at the Central Bank do not bother the GBP/USD bulls much.
The pound has surged to the forefront of the G10 currency race after strong labor market data from the UK increased the probability of raising the repo rate from the current level of 4.5% to 5.5%. American stock indices and the strengthening of the euro against the U.S. dollar amid hawkish rhetoric from ECB President Christine Lagarde added fuel to the rally of the analyzed pair. As a result, GBP/USD soared to its highest level since April 2022.
Investors do not rule out that borrowing costs may rise by 50 basis points to 5% in June, and Bloomberg experts sound the alarm. In their opinion, the UK economy will face a deep recession if borrowing costs rise to the highest level in 22 years at 6%. This circumstance is a compelling reason for the Bank of England centrists to slow down or halt the process of tightening monetary policy.
Bank of England interest rate dynamics
On the other hand, the interest rate swap market sees a high probability of a new extreme inflation after its slowdown over the past few months. It will occur in 2024, and by the end of next year, derivatives are expecting consumer prices to reach 5%. This is in clear contrast to the Bank of England’s forecasts, which assume a return of inflation to the 2% target in 2025. If the futures market is right, action needs to be taken immediately. That is the verdict of the MPC hawks.
It seems that both the hawks and their opponents have a difficult task ahead. To prevent a new surge in consumer prices in the near future, it is necessary to raise the repo rate as high as possible. And this threatens a deep recession.
Meanwhile, the markets appear overly confident. Firstly, they expect a 100 basis point increase in the repo rate. Secondly, they predict an increase in the federal funds rate by only 25 basis points, not 50 basis points, as in the updated FOMC assessments. Such monetary policy divergence pushes GBP/USD quotes upward—towards the sun. However, they may get burned.
Technically, the upward trend in the analyzed pair is gaining momentum. However, near the target level of 161.8% according to the AB=CD pattern, GBP/USD bulls may want to start taking profits. It corresponds to the 1.291 mark. A rebound from this resistance or a drop below the 1.2785 pivot level are reasons for short-term pound selling against the U.S. dollar.
The material has been provided by InstaForex Company – www.instaforex.com
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