The Bank of England is facing a challenging situation
June 24, 2023 3:22 pm
The latest reports on inflation have generated mixed feelings. In the United States, inflation continues to decrease steadily, while in the European Union, it is decreasing moderately. However, in the United Kingdom, the pace of decrease is minimal. Over the past two weeks, all three central bank meetings have taken place, and their responses have been informative but have yet to be definitive. For instance, the Federal Reserve has decided to pause, which seems reasonable considering the 4% decrease in inflation. However, we are still receiving signals of potential monetary policy tightening. The Federal Open Market Committee (FOMC) could have extended its pause beyond July, as inflation may slow down even without further interest rate hikes.
On the other hand, the European Central Bank (ECB) has reacted more neutrally, adopting a “goal-oriented, no obstacles seen” approach. The interest rate in the European Union started rising later than in other regions, and the ECB is now following its intended path while recognizing that the current rate is inadequate to reach the target. Consequently, each new policy tightening in Europe does not elicit significant emotions.
The Bank of England has taken an intriguing course of action, showing signs of panic (understandably) by raising the interest rate by 50 basis points, surprising the market. As I mentioned earlier, there were valid reasons for this decision, as inflation did not decrease after May, and core inflation increased. However, what adds to the intrigue is that the demand for the pound did not rise despite the unexpected 50-point rate hike. This decision is considered the most aggressive possible. Speculating on the Bank of England’s next steps is quite challenging. Rishi Sunak and Andrew Bailey have promised that inflation will decrease by half by the end of the year, and if they fail to fulfill their promises, it may jeopardize their positions. The United Kingdom is accustomed to changing prime ministers and central bank heads without significant issues.
Given these circumstances, the British regulator may become anxious and raise the interest rate to a level that will undoubtedly push the British economy into a recession. A rate hike in this context has both positive and negative consequences. On the one hand, the market may find satisfaction in the rate increase, leading to increased demand for the pound. On the other hand, the economic decline, which would necessitate further stimulus through various programs, is unlikely to please pound supporters. I see no compelling reasons for further appreciation of the pound. Fortunately, the Fibonacci level of 161.8% provides significant support in the current wave analysis.
Based on the analysis, a new downward trend segment is being formed. There is still ample room for the pair to decline. Targets around 1.0500-1.0600 are quite realistic, and I recommend selling the pair with these targets in mind. I consider the completion of wave b highly probable, especially since the MACD indicator has already generated two “down” signals. Alternatively, if we consider a different wave analysis, the current wave may be more extended, but the formation of a downward trend segment will follow it. Consequently, I do not recommend buying it.
The pound/dollar pair’s wave pattern has changed, indicating the development of an upward wave that could conclude at any moment. Consider buying the pair only if a successful breakthrough is above the 1.2842 level. Conversely, selling is also recommended due to the two unsuccessful attempts to break this level, and it is advisable to set the stop-loss above it. The MACD indicator has also provided a “down” signal.
The material has been provided by InstaForex Company – www.instaforex.com
The latest reports on inflation have generated mixed feelings. In the United States, inflation continues to decrease steadily, while in the European Union, it is decreasing moderately. However, in the United Kingdom, the pace of decrease is minimal. Over the past two weeks, all three central bank meetings have taken place, and their responses have been informative but have yet to be definitive. For instance, the Federal Reserve has decided to pause, which seems reasonable considering the 4% decrease in inflation. However, we are still receiving signals of potential monetary policy tightening. The Federal Open Market Committee (FOMC) could have extended its pause beyond July, as inflation may slow down even without further interest rate hikes.
On the other hand, the European Central Bank (ECB) has reacted more neutrally, adopting a “goal-oriented, no obstacles seen” approach. The interest rate in the European Union started rising later than in other regions, and the ECB is now following its intended path while recognizing that the current rate is inadequate to reach the target. Consequently, each new policy tightening in Europe does not elicit significant emotions.
The Bank of England has taken an intriguing course of action, showing signs of panic (understandably) by raising the interest rate by 50 basis points, surprising the market. As I mentioned earlier, there were valid reasons for this decision, as inflation did not decrease after May, and core inflation increased. However, what adds to the intrigue is that the demand for the pound did not rise despite the unexpected 50-point rate hike. This decision is considered the most aggressive possible. Speculating on the Bank of England’s next steps is quite challenging. Rishi Sunak and Andrew Bailey have promised that inflation will decrease by half by the end of the year, and if they fail to fulfill their promises, it may jeopardize their positions. The United Kingdom is accustomed to changing prime ministers and central bank heads without significant issues.
Given these circumstances, the British regulator may become anxious and raise the interest rate to a level that will undoubtedly push the British economy into a recession. A rate hike in this context has both positive and negative consequences. On the one hand, the market may find satisfaction in the rate increase, leading to increased demand for the pound. On the other hand, the economic decline, which would necessitate further stimulus through various programs, is unlikely to please pound supporters. I see no compelling reasons for further appreciation of the pound. Fortunately, the Fibonacci level of 161.8% provides significant support in the current wave analysis.
Based on the analysis, a new downward trend segment is being formed. There is still ample room for the pair to decline. Targets around 1.0500-1.0600 are quite realistic, and I recommend selling the pair with these targets in mind. I consider the completion of wave b highly probable, especially since the MACD indicator has already generated two “down” signals. Alternatively, if we consider a different wave analysis, the current wave may be more extended, but the formation of a downward trend segment will follow it. Consequently, I do not recommend buying it.
The pound/dollar pair’s wave pattern has changed, indicating the development of an upward wave that could conclude at any moment. Consider buying the pair only if a successful breakthrough is above the 1.2842 level. Conversely, selling is also recommended due to the two unsuccessful attempts to break this level, and it is advisable to set the stop-loss above it. The MACD indicator has also provided a “down” signal.
The material has been provided by InstaForex Company – www.instaforex.com
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