Pound returned to yearly lows and is poised for another decline to levels reached during the start of the coronavirus pandemic in 2020. It is likely that today's statements by Bank of England Governor Andrew Bailey will cause a new wave of sell-offs in the market, especially since the crisis in UK households and cost of living are putting pressure not only on the government, but also on the economy.
UK is about to face the biggest decline in living standards in the century. Economists have warned that a 10% drop in real disposable income may occur in the next two years as soaring electricity bills have pushed inflation into double digits. This will hurt households and push about 3 million citizens into poverty.
Inflation exceeding 13% will also affect workers, with the poorest feeling the most pressure. Various foundations and trade unions already called on the government to raise social benefits in preparation for a possible rise of electricity bills by 80% in October this year.
Following the news that Liz Truss will become the new UK prime minister, Deutsche Bank said that political announcements in the coming weeks will be critical in determining the future development of the UK economy. "With the current account deficit already at record levels, the pound needs large capital inflows supported by increased investor confidence and lower inflationary expectations. However, the opposite is happening," they noted.
With the UK suffering from the highest inflation rate among the G10 countries, as well as the deterioration of growth prospects, no one is in a hurry to invest in pound and the UK economy. The Deutsche Bank said the large-scale, unfunded and untargeted fiscal policy, accompanied by constant changes in the mandate of the Bank of England, could lead to an even greater increase in inflation expectations.
On a different note, Andrew Bailey's speech today could affects his political future as during the election race, Truss accused the Bank of England of allowing inflation to soar to a 40-year high. She said it is possible that in the near future, the mandate of the central bank may be revised again, which does not add confidence to the British pound.
So far, pound is trading below the 15th figure, which creates some difficulties for buyers. There is very little chance of a major upward correction, especially if the bears go back to the yearly low and set their sights on updating it. Buyers now need to do everything to stay above 1.1450 as failing to do this will prompt a wave of sell-offs towards the level of 1.1410. Its breakdown will then open a path to 1.1360 and 1.1310. A correction will occur after a consolidation above 1.1510, followed by a rise to 1.1560 and 1.1610.
In terms of EUR/USD, the risk of a further decline remains high. Trading continues to be below parity, which creates additional pressure on the pair. Bulls need to cling to 1.0000 because without it, there is little chance for the quote to increase. Going beyond 1.0000 will give confidence to buyers and prompt a rise to 1.0030 and 1.0090. The farthest target will be 1.0130. But if euro falls below 0.9880, sellers will take the chance to bring the quote to the lows of 0.9850 and 0.9810.
