British Pound Forecast: Bearish
- The Pound has lost a lot of fundamental support with the Bank of England’s latest decision
- UK interest rates are on hold and the prospect of recession is growing
- Inflation remains elevated but seems likely to slide further
The British Pound’s long retreat looks set to continue into a new trading week, with the currency’s already-limited attractions fast running out.
Most damagingly Sterling has lost a lot of its previously reliable interest-rate support. The Bank of England chose to keep its base rate steady at 5.25% on September 21, marking the first Monetary Policy Committee meeting since November 2021 at which borrowing costs weren’t raised.
That decision followed news that consumer price inflation had slowed for a third consecutive month in August, confounding expectations that it might tick higher once again.
The Bank of England’s call looked utterly justified in view of the latest economic data, to which it will have had access before the markets. Retail sales wilted last month, according to official figures. They fell by 1.4% on the year when the markets had looked for a similar rise.
At least as worryingly, the more forward-looking Purchasing Managers Index series for this month showed all sectors of the economy firmly in contractionary territory.
The threat of recession now glowers over the United Kingdom, a gloomy prospect which earlier in the year seemed far distant as the country surprisingly outperformed some European peers.
The MPC has duly downgraded its own forecast for the economy and now expects a rise in Gross Domestic Product of just 0.1% in the third quarter of 2023. That’s down from an already anemic August forecast of 0.4%. On current showing it will be lucky to get even that.
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The coming week doesn’t offer much in the way of first-tier data, with sterling therefore probably left to stew in its own unappetizing juice. The final official look at second-quarter GDP data is coming up on September 29, but that is likely to prove rather too historic now to have much effect on the market. In any case, a modest quarterly rise of 0.2% is all the market expects.
Sterling bulls will cling to the hope that markets underprice the prospect that local interest rates may yet have to go higher to bring inflation to heel; at 6.7%, UK consumer price rises remain the highest of all major developed economies after all. But that thesis will take time to develop, assuming it ever does and, with that in mind, it’s got to be a bearish call for the Pound this week.
The developing base case for the currency is that rates are likely to remain at their current level for some time, but likely won’t go any higher. Still, the BoE’s rate setters were deeply split, with the Governor’s casting vote required to break a 4/4 deadlock between holding rates and raising them.
GBPUSD Technical Analysis
GBP/USD Daily Chart
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GBP/USD’s retreat from the fifteen-month peaks scaled in July has been pretty relentless and seems to be gathering pace, which looks understandable enough given UK fundamentals.
On its daily chart, the Pound has fallen through the first Fibonacci retracement of its rise up from the lows of September 2022 to those July peaks. That came in at 1.24824 and finally gave way after a few days of bearish probing on September 13.
It’s perhaps surprising that Sterling didn’t slide a lot further having abandoned this point, but for the moment it’s holding on above the next significant low, that’s 1.23147, the intraday low of May 25.
Below that point, the second retracement level at 1.20754 will beckon.
For now, GBP/USD is in a fairly well respected downward channel, most recently confirmed by its retreat from 1.27613 on September 1. That channel now suggests support at 1.22612.
Crumbs of comfort for technical bulls are at least as rare as they are on the fundamental side. The pair’s Relative Strength Index has strayed unsurprisingly toward oversold territory around the 30 level, and that might argue for a modest bounce perhaps early in the week as traders take stock. Even so, it will take a break of resistance at the down-channel top of 1.25895 to really slow Sterling’s fall, and that looks like a tall order.
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–By David Cottle for DailyFX