Judging by the chart, the pound sterling feels exhausted before another rate hike by the Bank of England. The reason behind GBP's weakness is a tint of a dovish stance as the regulator is trying to strike a balance between high inflation and a slowdown in economic growth. The Bank of England is widely expected to raise interest rates for the fourth time at the meeting today. An annual inflation rate in the UK jumped to the strongest level in 30 years. The CPI reached 7% in March, driven by soaring food and energy prices. There are no preconditions that inflation will ease. In this context, consumer confidence sank. Besides, analysts fear a slowdown in the UK economic growth on the back of simmering hostilities in Ukraine. Notably, a few tranches of sanctions imposed against Moscow by the UK and other Western countries have backfired on the European economy. In fact, economic sanctions are putting a strain on both sides.
The Bank of England is likely to raise the key policy rate to 1.0% today by 25 basis points. Like other central banks, the Bank of England is facing the challenge of curbing high inflation without putting a lid on economic growth. Recently, Governor Andrew Bailey said that the central bankis following a narrow path between economic growth and inflation. The Governor signaled that the regulator might consider smooth monetary tightening without following hot on the heels of the Federal Reserve which raised the funds' rate by 50 basis points.
In February, economists projected that inflation would peak at 7.25% in April. Nowadays, they brace for higher CPI scores. Amid strong inflationary pressure, the Bank of England thinks that a sharper rate hike poses some risks. Some analysts warn that the UK economy has been already at the early stage of recession. Economists believe that it would be better to maintain monetary policyunchanged amid the ongoing uncertainty until the situation clears up.
Evidently, the practice of shifting the blame to Russia does not help to deal with the doom andgloom in the domestic economy. Before Russia's invasion of Ukraine, the BoE Monetary Policy Committee forecasted persistent high inflation and bleak economic prospects. Today policymakers will come up with revised forecasts. Obviously, the regulator has to make more complicated decisions on how to fight soaring inflation and prop up economic growth. The CPI is expected to jump to 9% in April in the forecast presented today. Annual rates are likely to settle at around this reading throughout the whole of 2022. The GDP contraction of 0.25% would be the most optimistic forecast for 2022.
On the back of economic uncertainty, BoE policymakers differ in their viewpoints. They voted 8:1 inMarch for increasing interest rates by 25 basis points. Deputy Governor Jon Cunliffe referred to two-sided risks to make an inflation forecast when he voted for keeping the policy rate unchanged. If the Bank of England does not revise its monetary policy, the pound sterling will come underpressure again. Interestingly, the Federal Reserve raised the official fund's rate by 50 basis points yesterday for the first time since 2000. Notably, the same policy moves are planned for June and July. However, market participants expected a more aggressive agenda. The central bank also announced that it would begin tapering its balance sheet from June 1 by $47.5 billion per month. In three months, the regulator will cut its balance sheet at a faster pace of $95 billion per month.
This flexible approach and the decision to stick to the ongoing monetary policy amid soaring inflation in the US at about 8.5% on year could influence the Bank of England's policy update. So, the British regulator might soften its rhetoric.
GBP/USD
As I mentioned above, buyers of risky assets should make efforts to enable an upward correction because the overall bearish trend is still valid. The ongoing correction might come to an end soon as the bears will easily find an excuse. For example, the speech by Andrew Bailey today might encourage the bears. I would recommend buying GBP in the short term at price dips because the bulls could enter the market. The nearest resistance levels are seen at around 1.2620. A breakout of this area will push the price to 1.2690 and 1.2730. Alternatively, a breakout of 1.2530 will cement the bearish momentum and open the door to lower lows at 1.2455 and 1.2380. The lowest downward target is seen at 1.2320 which coincides with support. The price will print a lower low if the British economy quickly slips into a worse state.
EUR/USD
After the price settled at 1.0470, the bulls entered the market in the run-up to yesterday's FOMC policy meeting. The bulls made the right decision. Expectations of the ECB's more aggressive monetary policy make the euro more attractive, especially post the FOMC meeting yesterday. On the other hand, escalating geopolitical jitters due to Ukraine's rejection to proceed with the peace talks as well as disruption in logistic chains across EU countries would cap the bullish momentum of risky assets. In the short term, it would be better to wait for a large upward correction that is going on amid fixing profits in light of the US economic data. To stop the bearish trend, the buyers have to protect the nearest support at 1.0580. If they miss it, the bears will be able to push the trading instrument down to new lows at 1.0520 and 1.0470. The lower target is seen at 1.0420 which matches support. For the time being, EUR/USD should be traded following the upward correction because the bulls have already climbed to 1.0580 aiming to break 1.0640. Afterward, the door will be open towards 1.0690 and 1.0740.
