What’s Next for the GBP?
The outlook for the UK remains bleak with the Bank of England projecting 5 quarters of recession. On top of this, the UK is in a bleak political phase. The current Conservative power is in power but widely expected to lose to Labour at the next General Election. Some Conservative MPs are already planning their exit. With issues like Brexit, cost of living, and bolstering a Covid-worn National Health Service dominating the focus, there is a dearth of positivity for the UK. Post Brexit, the UK is still to find its new place in the world and it is lacking detail in its sound bytes.
The last BoE meeting
At the last BoE meeting the Bank of England raised interest rates by 50bps to 3.50%. The Monetary Policy Committee vote showed a vote split of 6-3. Two members wanted to keep rates at 3%, and one member wanted to raise interest rates even higher to 3.75%. This shows the growing stagflationary fears for the UK. What problem should the BoE focus most clearly on? Growth or inflation. The members wanting to keep rates unchanged favoured focusing on growth. The members wanting to raise rates even higher were focused on bringing down inflation. Expect this dynamic to be a source of tension for the BoE at its next rate meeting on February 02. You can’t have your cake and eat it in the interest rate world – you have to choose which fire you will fight – inflation or growth? So, the risk for the BoE not doing enough to crimp inflation and that creates pain down the line. It could be 2 / 3 years down the line, but these inflationary periods can move in multi-year cycles. Keep this in mind.
The opportunity to look for
However, this does create some opportunities. If the UK is able to put in some surprising data points then the GBP could come back into fashion. However, in monitoring incoming data don’t forget the influence that the USD has on the GBP. If US inflation starts rising again then that will increase expectations for the Fed to be more aggressive. That in turn will likely boost the USD and weaken GBPUSD. So, in looking at the path of the GBP you must factor in the path of the USD too. This is easily overlooked by some, so don’t make this mistake. See the full BoE statement here.
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