GBPUSD downward signal

30 January 2024 52
GBPUSD downward signal

The Bank of England intends to maintain the most conservative stance among other central banks in cutting interest rates until it hits its inflation target. But it can only behave this way until weaker economic data forces it to act. If the Federal Reserve cuts rates this spring, the U.K. central bank will be in a tight spot. European Central Bank President Christine Lagarde last week laid the groundwork for an eventual lowering of its deposit rate — an approach the BOE should heed.


Britain is no longer an outlier with higher residual inflation; consumer price increases have moderated after reaching double digits, with many economists expecting inflation to drop back to the BOE’s 2% target in the coming months.


Thursday's Monetary Policy Committee meeting is unlikely to deliver any policy changes, but its quarterly economic review and forecasts will be scoured for hints on when it might lower its official rate from 5.25%.


The key phrase from the last two statements concerns keeping interest rates "sufficiently restrictive for sufficiently long.” Removing this assertion would at least show that policymakers have dropped any pretension that borrowing costs need to go higher.


Economic growth has been a full percentage point lower over the second half of 2023 than the BOE expected, which should ring alarm bells. Many economists expect the BOE to ease as early as the next quarterly review in May, or soon thereafter. Even after the hawkish message from its last meeting, futures markets still expect a 100 basis points of cuts this year.


The BOE’s economists have been struggling with inaccurate labor and wages data sourced from the Office for National Statistics. The private-sector survey shows a decline in wage growth to 3% from 7.5% over 2023. That's inside the BOE's comfort zone. ONS data lags private surveys by about nine months but increases in official average weekly earnings have fallen to 6.5% from a high of near 9% last summer. That’s a full percentage point below what the BOE had factored in. Pay increases may still be too high — but the downward direction is unmistakable, and pay awards are tracking steadily lower.


Services inflation is likely to be the stickiest in returning to target, but it slowed to 6.4% in December, 0.5% lower than the BOE had expected. If the central bank waits until every last indicator is compliant, the economy will be in trouble.


The UK economy has been stabilizing for the past two years and still may succumb to a mild technical recession. The longer the BOE keeps monetary policy restrictive, the higher the risk becomes of a more severe downturn.


Bloomberg Economics expects April CPI to fall below the BOE's 2% target, and to drop to 1.5% later this year. Core prices, excluding volatile food and energy prices, should be below 3% by September. The inflation surge has been turned back — so there’s no need to sink the economy by stamping out every last trace.


Using this week's policy meeting to discuss the possibility of a rate cut would serve as an impetus to weaken GBPUSD.


From the point of view of technical analysis on GBPUSD, there is a level below the current price, which is likely to be the target of such a decline, it is 1.2350.


The overall recommendation is to sell GBPUSD with the target at 1.2350. A loss should be fixed at the level of 1.3140.

This content is for informational purposes only and is not intended to be investing advice.

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