The British pound is a paradoxical currency. Britain remains an outsider in terms of inflation in the G7 group of big advanced economies and is suffering from a textbook case of stagflation, while sterling has been the best-performing currency out of the G10 group of major currencies for a long time. However, the British pound edged lower after UK inflation data, giving in to the Swiss franc. The CPI dropped sharply to 7.9% in June from 8.9% a month ago, marking the lowest level in the last 15 months. As a result, the GBP/USD pair plummeted.
For the first time in the last five reports, consumer prices did not reach Bloomberg experts’ estimates. Even though they had regularly surpassed them before. A sharp slowdown in inflation led the money market to reassess the repo rate ceiling. This brought the figure to 5.8% compared to the previous rate of 6.75%. Its decline led to higher yields on British government bonds and a steep drop in the GBP/USD pair.
Deviations of actual inflation figures from forecasts
According to Oxford Economics, the British pound has reached its peak as the economic surprises beneficial for it are starting to change. Rabobank sees no reason why the market could remain bullish on sterling after the release of UK inflation data. ABN AMRO expects GBP/USD to fall to 1.25 by the end of the year.
In fact, its outlook is not so gloomy. The pair’s drop is due to speculators closing net longs in the British pound, which peaked in the week to July 18. From a fundamental perspective, sterling is still strong. Its rally in March-July was driven by diminished expectations regarding the UK economy. Over the last three months, GBP/USD traders have enjoyed positive reports. One of the latest retail sales data releases even allowed consulting firm EY to upgrade its UK GDP forecast for 2023 to 0.4% from 0.2%.
Nevertheless, inflation in the UK remains elevated. It is higher than in the US and the euro area. The monetary policy tightening cycles of the Fed and ECB are close to ending, whereas the Bank of England is likely to raise interest rates by another 75 basis points at its next three meetings. Expectations of further tightening are expected to support the GBP/USD pair.
Inflation dynamics in UK, US, and euro area
In my view, the British currency should not be underestimated. Sterling may well surprise its fans. Moreover, it is a pro-cyclical currency. Its dynamics depend on the state of the world economy. I hope for a soft landing in the United States, a stronger recovery in China’s economy, and the euro area’s ability to avoid a recession. As a result, global economic growth will accelerate, with GBP/USD resuming gains.
From a technical point of view, the Three Indians pattern has been formed on the daily chart. A drop below the low of the second Indian bar near 1.277 will increase the risks of breaking the uptrend. However, as long as GBP/USD is above this level, it is worth considering long positions, including when the price breaks through the resistance level of 1.290.
The material has been provided by InstaForex Company – www.instaforex.com
The British pound is a paradoxical currency. Britain remains an outsider in terms of inflation in the G7 group of big advanced economies and is suffering from a textbook case of stagflation, while sterling has been the best-performing currency out of the G10 group of major currencies for a long time. However, the British pound edged lower after UK inflation data, giving in to the Swiss franc. The CPI dropped sharply to 7.9% in June from 8.9% a month ago, marking the lowest level in the last 15 months. As a result, the GBP/USD pair plummeted.
For the first time in the last five reports, consumer prices did not reach Bloomberg experts’ estimates. Even though they had regularly surpassed them before. A sharp slowdown in inflation led the money market to reassess the repo rate ceiling. This brought the figure to 5.8% compared to the previous rate of 6.75%. Its decline led to higher yields on British government bonds and a steep drop in the GBP/USD pair.
Deviations of actual inflation figures from forecasts
According to Oxford Economics, the British pound has reached its peak as the economic surprises beneficial for it are starting to change. Rabobank sees no reason why the market could remain bullish on sterling after the release of UK inflation data. ABN AMRO expects GBP/USD to fall to 1.25 by the end of the year.
In fact, its outlook is not so gloomy. The pair’s drop is due to speculators closing net longs in the British pound, which peaked in the week to July 18. From a fundamental perspective, sterling is still strong. Its rally in March-July was driven by diminished expectations regarding the UK economy. Over the last three months, GBP/USD traders have enjoyed positive reports. One of the latest retail sales data releases even allowed consulting firm EY to upgrade its UK GDP forecast for 2023 to 0.4% from 0.2%.
Nevertheless, inflation in the UK remains elevated. It is higher than in the US and the euro area. The monetary policy tightening cycles of the Fed and ECB are close to ending, whereas the Bank of England is likely to raise interest rates by another 75 basis points at its next three meetings. Expectations of further tightening are expected to support the GBP/USD pair.
Inflation dynamics in UK, US, and euro area
In my view, the British currency should not be underestimated. Sterling may well surprise its fans. Moreover, it is a pro-cyclical currency. Its dynamics depend on the state of the world economy. I hope for a soft landing in the United States, a stronger recovery in China’s economy, and the euro area’s ability to avoid a recession. As a result, global economic growth will accelerate, with GBP/USD resuming gains.
From a technical point of view, the Three Indians pattern has been formed on the daily chart. A drop below the low of the second Indian bar near 1.277 will increase the risks of breaking the uptrend. However, as long as GBP/USD is above this level, it is worth considering long positions, including when the price breaks through the resistance level of 1.290.
The material has been provided by InstaForex Company – www.instaforex.com
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