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The British Pound Is on the Verge of Collapse as Rigid Monetary Policy Threatens Economic Growth

Leon Kramer

ByLeon Kramer

Aug 7, 2023

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  • The pound experiences a resurgence as the Bank of England readies itself for additional policy tightening.
  • The outlook for the United Kingdom appears to be less optimistic as a result of stringent policies that are dampening economic prospects.
  • According to BoE Pill, the interplay between increased unemployment rates and decreased job openings is expected to result in a subsequent decline in wage growth.

The GBP has found stability following a decline from the significant resistance level of 1.2800. Concerns about a worsening recession prompted this decline due to the Bank of England’s decision to raise interest rates. In recent developments, the GBP/USD pair has experienced a notable decrease due to the potential impact of elevated interest rates on the economic prospects of the United Kingdom. The labor market in the UK is experiencing a decline in resilience as companies adjust their hiring practices in response to challenging economic conditions.

The initiation of a robust rate-tightening cycle by the BoE has begun to impact the housing sector and labor market of the United Kingdom while simultaneously establishing a foundation for restoring inflation to its desired level of 2%. According to a prominent figure, inflation may decrease to 5% by October. This projection is based on the central bank’s intention to maintain interest rates at an adequately restrictive level for a significant duration.

Pound Sterling Recovers Amid Market Optimism

  • The pound manages to locate support around the 1.2700 level, despite the Bank of England’s decision to implement higher interest rates and the subsequent impact on the economic outlook.
  • The economic outlook of the United Kingdom is currently being closely examined, as policymakers at the Bank of England have indicated the possibility of further policy tightening.
  • In the previous week, there was an increase of 25 basis points (bps) in the interest rates by the BoE, resulting in a new rate of 5.25%. The recent interest rate increase marks the 14th consecutive hike within the ongoing cycle of tightening, resulting in interest rates reaching their peak over the past 15 years.
  • The remarks by the BoE Governor, Andrew Bailey, last week indicated the central bank’s intention to maintain interest rates at a level deemed “sufficiently restrictive” for an adequate duration. This approach aims to facilitate a prompt resurgence of inflation to the desired target of 2%.
  • Depending on the individual, it is believed that inflation is expected to decrease to 5% in October. This suggests that a specific UK PM may fulfill their commitment to reducing inflation by half within the current year. A man by the name of Sunak made the promise when inflation was high.
  • Following the recent monetary policy announcement, BoE chief economist Huw Pill expressed that a series of interest-rate hikes have been instrumental in tempering the labor market and alleviating inflationary pressures. It was further mentioned that increased unemployment and reduced vacancies would result in declining wage growth.
  • Due to the central bank’s assertive tightening cycle, there is an increasing impact on the labor market and housing sector.
  • According to a recent survey conducted by the Recruitment and Employment Confederation (REC) and KPMG, UK firms experienced a notable deceleration in their recruitment of permanent staff last month. According to Reuters, this slowdown, which is the most significant since mid-2020, is a result of growing concerns about the economic outlook.
  • As stated by REC Chief Executive Neil Carberry, the current state of the jobs market can be described as “fairly robust,” despite the observed deceleration in permanent placements.
  • In the current landscape, the housing sector exhibits vulnerability as prospective first-time home buyers delay their purchasing intentions to avoid increased interest obligations.
  • The prevailing sentiment in the market is one of caution, as investors eagerly anticipate the release of the United States inflation data for July, scheduled for Thursday.
  • The US Dollar Index (DXY) surpasses the 102.00 mark as Federal Reserve (Fed) policymakers maintain their optimism regarding the potential impact of further interest rate hikes on achieving the desired inflation target of 2%.
  • Based on a recent statement by Fed Governor Michelle Bowman, it has been indicated that the US central bank intends to implement additional interest rate hikes to address the issue of inflation. It was further mentioned that there was support for different policy tightenings in July due to robust consumer spending, a constrained labor market, and persistent inflation.
  • In the words of Raphael Bostic, the President of the Atlanta Fed Bank, it is anticipated that the central bank will maintain a restrictive stance in 2024. Regarding the labor market, the statement from the Fed policymaker indicates that July’s employment figures are based on anticipated outcomes. Additionally, the policymaker expresses a lack of astonishment at the continued robustness of wage growth.
  • In the previous week, the US Nonfarm Payrolls (NFP) report indicated an increase in employment of 187K, slightly surpassing June’s figure of 185K, albeit falling short of the projected 200K. The unemployment rate experienced a decline to 3.5%, reaching both the estimated and previous release of 3.6%.
  • The monthly labor cost index maintained a pace of 0.4%, as recorded in June, in line with investor expectations for a slight decrease in the economic data to 0.3%. The annualized labor cost index has maintained stability at 4.4%, which aligns with projected expectations of 4.2%.

Technical Analysis: The Pound Holds the 1.2700 Level

The British Pound is subjected to intense selling pressure to get closer to the critical resistance level of 1.2800. After conducting a test in the breakdown region of the Rising Channel chart pattern, The Cable detects the presence of selling interest. A negative trend is indicated by the asset’s current trading position, which is below both the 20-day and the 50-day Exponential Moving Averages (EMAs).

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Leon Kramer

Leon Kramer

Leon Kramer, a renowned financial author, enlightens Main Forex News readers with his deep understanding of currency markets. His years in global finance, combined with an intuitive grasp of trends, delivers insightful, up-to-the-minute foreign exchange analysis.

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