Amid the free collapse of the British pound against the US dollar, GBP/USD is at its lowest level ever. It was necessary for the Bank of England to exit to calm the panic of investors and markets.
- The GBP/USD pair collapsed to the 1.0352 support level at the beginning of this week, its lowest ever.
- A quick rebound occurred upwards, reaching the 1.0840 level, and settling around the 1.0700 level at the time of writing the analysis, waiting for any news.
- The Bank of England will talk to the markets, trying to convince them that it has the ability to tackle rising inflation.
This came according to the Bank of England's chief economist, Howe Bell, speaking at an event hosted by Barclays. In an effort to calm UK bond markets, and bruised sterling, Bell said the British central bank was ready to provide an "important policy response" at the November 3 policy meeting. The comments helped support the pound as it recovered from record lows against the dollar and below 1.10 levels against the euro, which it reached during Monday's heavy selling.
Rise in UK Bond Yields
The recent drop in the pound sterling comes alongside a rise in UK bond yields as investors demanded more compensation against UK government debt. The demands came on the heels of Chancellor Kwasi Kwarting's announcement of tax cuts last Friday. The tax cuts and energy price guarantee will be funded by billions of pounds through the issuance of additional debt, at a time when fears are mounting that the global economy will slip into recession. "It's hard not to draw the conclusion that this will require a significant monetary policy response," Bell added.
Economists say the energy price cap will lower the expected peak of UK inflation for 2022, but that inflation will remain stubbornly higher over a longer period as a result of fiscal stimulus. Bell also said, "I want to point out clearly at this point that the batch of financial announcements we've seen will be a catalyst in my view."
The British central bank has been tasked with keeping the inflation rate at 2.0% and will raise interest rates to slow the economy to the point where price hikes subside again over the coming months. In light of rising inflation expectations, the market now expects a rise of 200 basis points over the remainder of 2022, which is equivalent to a rise of 100 basis points in November and again in December.
Expectations of an emergency rate hike have been raised after the recent declines in the value of sterling, but it seems that bond markets prefer to wait until November and communicate their intentions to push financial markets to tighten. This "jaw bone" approach means that we can expect similar commitments to strong action by the Bank from other members of the MPC. For sterling to remain supported, the bank must now deliver what the market expects. Over the course of 2022, the British central bank has consistently lagged behind market expectations of the amount of increases needed, and when it met those expectations, it issued cautious forward guidance that inevitably undercut sterling.
The big risk is that the market will enter the November 3 decision to be disappointed again, which will lead to new lows in the sterling price towards the end of the year. Another risk is the markets refusing to wait until November, and the pound being penalized in the policy vacuum. Meanwhile, the pound-euro exchange rate remains vulnerable to further declines amid a deteriorating global backdrop which is largely a result of higher US interest rates.
The high rates of raising the cost of money at the global level, reducing lending and economic activity. Falling stock markets and commodity prices bear witness to this slowdown, as well as a stronger US dollar. This unhelpful backdrop will likely keep British assets under pressure, and with it the British Pound. Therefore, further declines are highly likely.
- There is no change in my technical view of the performance of the GBP/USD pair, as the general trend is still bearish.
- There is a clear ignoring on the part of investors to buy the sterling despite the price reaching the lowest ever and despite the arrival of all technical indicators towards strong oversold levels on all time frames .
- According to the current trend, the closest support levels for the pound will be 1.0630, 1.0500 and 1.0345, respectively.
On the other hand, according to the performance on the daily chart below, breaking the resistance 1.1365 will be important to change the current outlook. The Sterling Dollar will remain bearish until a quicker and more aggressive intervention by the Bank of England.