GBP/USD’s attempt to counterattack failed
October 25, 2023 12:22 pmVideo
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Despite all attempts at correction for GBP/USD, the weakness of the British economy doesn’t allow the bulls to expect significant success. They’ve had their fun, and that’s enough.
The most aggressive monetary tightening by the Bank of England, with the highest repo rate at 5.25% since 2008, is cooling down the UK economy. The GfK consumer confidence index noted its worst decline since March 2020 in October.
Dynamics of consumer confidence in Britain
The rising cost of living results in a decline in the purchase of non-essential goods and a 0.9% month-on-month drop in retail sales in September after dropping 0.4% in August. As a result, the entire economy is suffering, being in a state of stagflation. GDP teeters on the brink of contraction, and consumer prices in Britain at 6.7% are the highest among G7 countries.
The fact that the UK is at risk of a recession is also evidenced by the decline in the composite purchasing managers’ index to its lowest level since January. The indicator has been below the critical 50 mark for the third consecutive month, indicating a contraction in GDP.
The weakness of the economy forces the Bank of England to pause in tightening monetary policy. In early November, the repo rate will remain at 5.25%, according to 61 out of 73 Reuters experts; 11 believe that borrowing costs will increase. Interestingly, 16 out of 28 respondents predict that the monetary tightening cycle is not over. This circumstance could keep hope alive for the pound. However, whatever the outcome, the illusions have been lost, and the peak of GBP/USD may not continue.
Adding to the trouble is the acceleration of the Bank of England’s quantitative tightening program. This leads to a rally in the yields of British bonds and increases the cost of debt servicing for the Treasury. In 2022 alone, this cost the government £15 billion, and the Bank of England’s losses have reached a two-decade high. It’s not surprising that economists are calling for a halt to quantitative tightening, as ultimately, the increase in budget expenses will fall on the shoulders of British taxpayers.
Dynamics of the Bank of England’s balance sheet
Thus, the clouds are darkening over the UK economy, and the Bank of England’s monetary tightening cycle is complete. Deprived of its main trump card and having serious vulnerabilities, the pound can only count on a weakening U.S. dollar for a full correction. While hope was warm, GBP/USD jumped to 1.229. However, the weakness of British business activity amid a strengthening American counterpart has brought everything full circle—the pair is returning to a downward trend.
Technically, on the GBP/USD daily chart, the bulls’ inability to play out the reversal pattern 1-2-3 indicates their weakness. A drop in the pound below the support levels at 1.2145 and 1.211 is a reason for selling towards 1.1975 and 1.195.
The material has been provided by InstaForex Company – www.instaforex.com
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