The GBP/USD pair had been declining for the third consecutive day after a rapid ascent toward the 1.24 handle. This is due to the greenback's strength, driven by hawkish statements from some Federal Reserve officials, including Lori Logan and Michelle Bowman. The Fed's hawkish stance has invigorated dollar bulls, who were in a subdued state following the disappointing Nonfarm Payrolls data. Weak hopes for further near-term tightening of the monetary policy have once again emerged. Most importantly, the Fed has effectively ruled out the possibility of rate cuts in the near future, citing high inflation levels and risks that inflation may not cool as fast as they hoped.
In response to this, the dollar has regained some ground, including against the pound. The GBP/USD pair has failed to stay above the 1.23 level and is currently testing the support level at 1.2240 (the Kijun-sen line on the daily chart).
Following the Bank of England's November meeting, which took place last Thursday, the central bank left all monetary policy parameters unchanged, implementing the baseline, most expected scenario. However, the pound reacted positively to the outcome of the November meeting because the central bank, firstly, allowed for further monetary tightening (in the case of "more resilient than currently expected inflationary pressure"). Secondly, the central bank revised its forecasts regarding reaching the target inflation level. While the central bank previously assumed that the CPI would return to the 2% level by the second quarter of 2025, this time, the timeframe has been pushed to the end of 2025. The voting results on the interest rate provided indirect support to the pound. The decision to keep the rate at the current level was supported by 6 out of 9 members. Three members were in favor of a 25 basis point rate hike (expectations were for 7 or 8 committee members to support the status quo).
Even though all these hawkish signals were indirect and nuanced, they helped the pound stay afloat amid overly dovish expectations. Following these developments, Nonfarm Payrolls were released, which weakened the U.S. dollar. The current fundamental backdrop has allowed GBP/USD buyers to approach the 1.24 handle for the first time since September.
Currently, GBP/USD sellers are gradually regaining their lost positions, taking advantage of the greenback's strength and the passiveness of the British currency. The pound is unable to chart its own course since the BoE effectively maintained the parameters of its monetary policy and declared a status quo. Although the central bank left the door open for another rate hike, conditions need to be met for this to happen. In this context, macroeconomic data to be published on Friday, November 10th, concerning key figures on UK economic growth, will play a significant role.
Preliminary forecasts don't bode well for the pound. For instance, the UK GDP in the third quarter is expected to contract by 0.6% YoY, following similar growth in the second quarter. On a quarterly basis, the indicator is also expected to turn negative, falling to -0.1% QoQ (after a 0.2% increase in the previous quarter). If we look at the monthly dynamics, stagnation is expected with GDP growth of 0.00% in September. The industrial production figure is another potential disappointment for the bulls. According to general forecasts, the production volume in September is anticipated to decrease by 0.1% (on a monthly basis). On an annual basis, it should grow by 1.1% (it was at 1.3% in August).
It's clear that if the aforementioned indicators come in at least in line with the forecasts (not to mention if they dip into the "red zone"), the slim chances of another rate hike will vanish. And although BoE Governor Andrew Bailey reminded us after the November meeting that the central bank's mandate is price stability, "not preventing a recession," the BoE will have to consider the results of the third quarter when making decisions in the subsequent meetings.
Furthermore, the slowdown of the British economy will reignite discussions (or continue existing ones) about the prospects of a rate cut in the first half of next year. For instance, currency strategists at Commerzbank state that a rate cut "seems more and more likely." They also point out the dovish position of the BoE's chief economist, Huw Pill. According to experts, much will depend on the inflation dynamics in October (we'll learn this figure next week): if CPI falls below the 5% mark, as the central bank previously anticipated, the likelihood of a rate cut in the first half of 2024 will significantly increase. The economic slowdown in the UK in the third quarter will only reinforce market expectations of dovishness.
Therefore, the pound may soon come under significant pressure, regardless of the dollar's performance. If the key reports on the growth of the British economy disappoint, the issue of further monetary policy easing will be back on the agenda, even despite the BoE's denials. In that case, the GBP/USD pair might test the nearest support level at 1.2190 (the middle Bollinger Bands line on the daily chart) with a subsequent break towards the 1.21 level.
