British Pound Q2 2023 Fundamental Forecast: Waiting for Inflation to Fall
Recommended by Nick Cawley
For the Full British Pound Q2 Report, Click here
The British Pound is barely above its Q1 opening level with GBP/USD constrained in a six-point, sideways trading range since the start of the year. And this is not really surprising as the first quarter of 2023 has not delivered any major domestic policy moves or economic shocks to steer Sterling decisively one way or another. Interest rates have followed their expected path higher – currently at 4.25%, the highest level since 2008 – while PM Rishi Sunak and Chancellor Jeremy Hunt continue to steer a steady course and have so far avoided the pitfalls of the previous regime. The relationship between the UK and the European Union is also looking healthier with UK MPs backing PM Sunak’s new Northern Ireland deal, overriding Boris Johnson’s contentious Brexit accord agreed upon in 2019.
Inflation in the UK however remains in double-digits – currently 10.4% – a level that in normal circumstances would continue to require ongoing tightening of monetary policy by the central bank. However, according to the latest Bank of England Monetary Policy Report, inflation ‘is expected to fall significantly in Q2 2023’ due to the extension of the Energy Price Guarantee (EPG) announced in the recent budget and the fall in wholesale energy prices.
With price pressures expected to ease sharply, the BoE may not need to hike rates aggressively in the coming months, if at all. The next Bank of England meeting is in mid-May allowing Governor Bailey plenty of time to digest a range of fresh inflation, growth, and jobs data. The latest BoE rate hike probabilities show one 25bp rate hike expected in Q2 before the central bank hits the pause button.
Monthly UK GDP is estimated to have increased in January 2023 by 0.3%, according to updated Office for National Statistics (ONS) data, following a 0.5% decline in December. According to the ONS, monthly GDP is now seen at 0.2% below its February 2020, pre-coronavirus levels. With growth edging higher, and inflation expected to fall, the BoE may hold back on further rate hikes if data permits.
While domestically the UK may seem to be in a state of calm, external factors could quickly change this. Fears that contagion from recent bank failures in the US may creep over the Atlantic remain, while the emergency bailout and forced purchase of Credit Suisse by peer UBS is also ringing alarm bells at the UK central bank. The BoE’s Financial Policy Committee (FPC) recently said that the UK banking system ‘maintains robust capital and strong liquidity positions’ and that in their assessment, ‘the UK banking system remains resilient’.
Looking ahead, the British Pound may continue to move sideways to gently higher against the US dollar. The greenback is under pressure and weakening as traders continue to price in an end to the Federal Reserve’s rate hiking regime.
DailyFX Market Opinions
Any opinions, news, research, analyses, prices, or other information contained in this report is provided as general market commentary and does not constitute investment advice. DailyFX will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.
Accuracy of Information
The content in this report is subject to change at any time without notice and is provided for the sole purpose of assisting traders to make independent investment decisions. DailyFX has taken reasonable measures to ensure the accuracy of the information in the report, however, does not guarantee its accuracy, and will not accept liability for any loss or damage which may arise directly or indirectly from the content or your inability to access the website, for any delay in or failure of the transmission or the receipt of any instruction or notifications sent through this website.
This report is not intended for distribution, or use by, any person in any country where such distribution or use would be contrary to local law or regulation. None of the services or investments referred to in this report are available to persons residing in any country where the provision of such services or investments would be contrary to local law or regulation. It is the responsibility of visitors to this website to ascertain the terms of and comply with any local law or regulation to which they are subject.
Trading in financial markets, foreign exchange, indices, and commodities on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade in financial markets, foreign exchange, indices, and commodities, you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain losses in excess of your initial investment. You should be aware of all the risks associated with financial markets, foreign exchange, indices, and commodities trading and seek advice from an independent financial advisor if you have any doubt