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FX.co ★ GBP bears to fall prey to hawks?

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Forex Analysis:::2022-11-28T08:47:51

GBP bears to fall prey to hawks?

In September, the pound sterling plummeted due to the political crisis in London triggered by controversies over fiscal and monetary policies. The government of Liz Truss wanted to prop up the country with economic stimulus whereas the Bank of England continued its cycle of rate hikes. Eventually, Rishi Sunak advocating for fiscal consolidation was appointed the next Prime Minister. He managed to quell market jitters. However, the Bank of England's policymakers reckon that raising taxes will be able to tame high inflation. In fact, the actual tax increase will come into force in three years when the central bank expects consumer inflation to decline back to the target level of 2% annually. Nevertheless, the GBP/USD bulls are not alarmed by such prospects.

Since December 2021, the Bank of England has raised interest rates 8 times which now stands at 3%. The Monetary Policy Committee is widely expected to increase the key policy rate by another 50 basis points at the final meeting in 2022. At the same time, the MPC members divided in opinions in November. 7 out of 9 policymakers voted for a rate hike by 75 basis points at the last meeting. The rest of the members said that the cost-of-living crisis requires a cautious approach to tightening financial conditions.

Flow chart: Inflation versus REPO rate

GBP bears to fall prey to hawks?

Indeed, market participants have been speculating on the ailing British economy for long. Interestingly, not all hawks of the Bank of England accept the gravity of the situation. David Ramdsen stated that the central bank's forecasts amid the robust labor market and rising inflation expectations could exaggerate weakness in GDP. If inflation expectations persist, high prices will remain at elevated levels in the UK for long. His colleague Catherine Mann doubts that inflation will hardly ebb away to the target level of 2% in 2024. Apparently, the annual CPI is likely to get stuck at above 3%, the upper border of the range set by the Bank of England.

If the hawks push ahead with the rhetoric in the Monetary Policy Committee, the odds are that GBP/USD will continue its steady rally, especially when the Federal Reserve is poised to moderate the pace of further monetary tightening. According to the survey by MLIV Pulse, 70% of investors think that the US dollar is doomed for weakness in about a month. Notably, the same hare of pollees predicted the US dollar's strength in October.

Market sentiment is rapidly revised nowadays. As soon as Wall Street indices take a nosedive following a 13% rally from October's lows, GBP/USD will go down immediately due to global risk aversion. In the meantime, there are lots of preconditions for that. Wall Street analysts predict a contraction in corporate earnings in Q 2022.

Flow chart: US corporate earnings

GBP bears to fall prey to hawks?

GBP bears to fall prey to hawks?

The most powerful short-term effect on the currency pair will be made by a speech by Jerome Powell and the US nonfarm payrolls. The Federal Reserve Chairman might express discontent about weakening financial conditions. So, his hawkish rhetoric will be certainly bullish for the US dollar. On the contrary, a slowdown in employment growth will push the US dollar down.

Technically, on the daily chart of GBP/USD, the sellers want to work out the patterns: Three Indians and the Inner bar. If the currency pair falls below 1.203, traders will have an excuse to sell GBP/USD. Alternatively, if the instrument rebounds to the upper border of the Inner bar at about 1.2125, there will be an opportunity to open long positions.

Analyst InstaForex
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