The British pound climbed to the maximum height in the last two weeks against the US dollar thanks to Jerome Powell's hints in Jackson Hole that, unlike the curtailment of QE, we should not expect an early increase in the federal funds rate. However, when the Bank of England is also in no hurry to normalize monetary policy, and the UK economy begins to show signs of slowing down and losing to the US, the success of the "bulls" on GBP/USD looks like a Pyrrhic victory.
Britain risks sliding into stagnation, a situation that combines high inflation and weak GDP growth, with a greater probability than the US will do. Both countries face problems in the supply of goods and labor, but in the north of Europe, the degree of difficulties is higher. In the US, people are in no hurry to return to the workforce because of incentive checks from Joe Biden. In the UK, the shortage of employees is due not only to fiscal assistance but also to a lack of qualified workers, as well as the rupture of economic ties due to Brexit. The stocks of goods in the warehouses of manufacturers have never been so low as now. This circumstance, coupled with the demands of new employees for a high salary, can heat up inflation red-hot.
Dynamics of stocks of goods in warehouses of British manufacturers
Besides the shortage of staff, Brexit, and fears about excessively high inflation, there are fears that when schools open in September, the number of COVID-19 infections will increase. Epidemiologists warn that the share of positive tests for coronavirus in secondary educational institutions increased from 0.1% in May to 1.5% in July. At the same time, the level of immunity acquired by children is estimated at 20%. Scientists would like it to grow to 40-70%, but the government does not intend to back down in the full opening of the economy.
The problem of the slowdown in GDP growth will certainly not leave indifferent the members of the Bank of England's MPC. At first glance, its strategy of normalizing monetary policy looks more aggressive than that of the Fed. The BoE is ready to raise the repo rate from 0.1% to 0.25% in 2022. However, then the Central Bank will take a break until the end of 2023, and the Fed will have the opportunity to bypass it at the turn.
FOMC members have been issuing hawkish rhetoric lately, which is a bearish factor for GBP/USD. Cleveland Federal Reserve Bank President Loretta Mester noted that QE should be phased out as soon as possible so that the Fed would have room to maneuver before raising the federal funds rate. The head of the Federal Reserve Bank of Atlanta, Rafael Bostic, believes that it is necessary to start getting rid of monetary stimulus in October. And even the Federal Reserve Vice Chairman Richard Clarida is ready to do it if the August employment report turns out to be as strong as in June and July.
Technically, the closing of the test bar below the dynamic resistance in the form of a moving average near 1.373 is a reason to sell GBP/USD in the direction of the targets for the child (red) and parent (blue) AB=CD patterns by 161.8%. These targets correspond to 1.349 and 1.33.
GBP/USD, Daily chart
