The British pound has surprised traders more than once with its often inadequate, at first glance, reaction to various growth events. It hasn't stopped doing it to this day. It seems that the GBPUSD pair should have soared in response to the third consecutive increase in the repo rate by the Bank of England from 0.5% to 0.75% at a meeting on March 17th. This is the most aggressive monetary restriction since the regulator gained independence in 1997. This speed puts the BoE at the forefront of the world's major central banks tightening monetary policy, and sterling is falling. A paradox?
In fact, investors have caught signs of a dovish attack. First, the MPC voted to raise the rate by eight votes to one, and Deputy Governor Jon Cunliffe felt that borrowing costs should be kept at the same level, as higher commodity prices would hit domestic demand hard. Secondly, none of the Committee's "hawks" proved to be a proposal to raise the repo rate by 50 basis points at once. Finally, the market was given to understand that the issue of the fourth act of monetary restriction in a row was hanging in the air. The Bank of England believes that further moderate tightening may be appropriate, but there are risks on both sides of that judgment. Therefore, BoE intends to act depending on how the medium-term outlook develops. In February, the regulator noted that a tightening would likely be appropriate.
As a result, the derivatives market took a step back. It backtracked on its idea of five repo rate hikes in 2022, which initially put pressure on the GBPUSD. However, the pair was able to quickly regain lost ground and moved upward thanks to improved global risk appetite. U.S. stocks ended the week on March 18 with the best performance since November 2020, the S&P 500/gold ratio is skyrocketing, as is U.S. Treasury yields. This is due to Jerome Powell's confidence in the strength of the American economy, Beijing's unwillingness to support Moscow in Ukraine, the improvement in the epidemiological situation in China, and the fact that Russia managed to avoid default.
Dynamics of the S&P 500 and gold
As for the Bank of England, however paradoxical it may sound, it intends to fight inflation with the help of inflation. The rapid rise in the cost of electricity and goods is slowing down GDP growth and could have a dampening effect on consumer prices in the long run. BoE predicts that CPI will reach 8% in the near future and may accelerate further by November.
The dynamics of British inflation
Let's see if BoE Governor Andrew Bailey and his colleagues are right. The pound will have a busy week in terms of the economic calendar, and the release of inflation data seems to be the key event of the five-day period. Bloomberg experts predict that CPI accelerated in February from 5.5% to 5.9%.
Technically, the formation of an inside bar on the GBPUSD daily chart allows placing pending orders to buy from 1.32 and to sell from 1.311. The position should be closed within 1-3 days after the activation of orders at market prices.
GBPUSD, Daily chart
