Numerous dovish signals from the Bank of England and a surprisingly strong U.S. jobs report for January dropped GBPUSD to a region of monthly lows. There is nothing worse for the bulls than a weaker than expected pound and the U.S. dollar rising from the ashes. The stars aligned in such a way that both unpleasant factors won back. What started as profit-taking on long positions may eventually end in a full-blown correction.
It all started with the Bank of England, which by 7–2 votes raised the repo rate by half a point to 4%. Even if we are talking about the highest level since 2008 and the most aggressive monetary restriction in several decades, investors accepted this +50 bps as dovish. First, the BoE removed the wording of decisiveness in its accompanying statement. Secondly, its updated forecasts suggest that inflation will slow down from the current 10.5% to 4% by the end of 2023, and even to 2% by the end of 2024. Such figures speak of the confidence of the central bank that consumer prices have indeed turned the corner. Finally, two dissident members of the MPC considered that if the rate was raised by 50 bps, then it would have to be lowered.
Dynamics of the repo rate expected by the markets
As a result, no matter how much Andrew Bailey tried to say that the BoE's job was yet to be done and that inflation had not been beaten, the futures market lowered the expected repo rate ceiling from 4.4% to 4.35%. This triggered a profit-taking on GBPUSD longs and a correction in the pair. Moreover, the Bank of England is still extremely pessimistic about the prospects of the British economy.
Although its updated forecast assumes a lower recession depth than before, instead of recovering in 2024, BoE expects to see stagnation and does not assume that the country will return to its pre-pandemic levels until 2026. This has much in common with the IMF's opinion, which considers the UK economy the weakest from the G7 countries.
Forecasts for the UK economy
Of course, the -0.7% GDP expected by the central bank in 2023 is a smaller figure than the recessions of 1980 and 2008, which cost the economy more than 5% each, but if other countries manage to avoid a recession, then any recession in Britain is a reason to sell sterling.
In this regard, the release of UK Q4 GDP takes on a special color. Bloomberg experts forecast a zero dynamics, however any reduction will mean a technical slowdown, adding fuel to the fire of GBPUSD sell-off. Especially with the U.S. dollar coming back into play.
Incredibly strong U.S. employment statistics have increased the chances of a federal funds rate hike to 5.25%, reduced the likelihood of a dovish Fed reversal and brought interest back to the U.S. Dollar.
Technically, on the daily chart of the GBPUSD, there is a realization of the Double Top pattern. The pair's inability to cling to the convergence zone 1.206–1.208 or a rebound from trend lines near 1.2135 and 1.2225 are reasons for selling.
