The acceleration of Britain's inflation will increase the risks of the GBP/USD correction

 If you are drowning - you're on your own. After the pound has lost about 6% of its value over the last month, it is very hard to find a person willing to catch falling daggers. Disappointing macroeconomic statistics, the pigeon rhetoric of the Bank of England and its lowering of the GDP growth forecasts from 1.8% to 1.5% in 2018 pushed the GBP/USD to five-month lows. One can not but admit that the dollar resurrected from the ashes contributed to the collapse of the pair. However, when the market is full of negativity, you start to look for a catch.

In my opinion, the main damage from the strengthening of the greenback should be borne by the yielding currencies. First, the growth of the US debt market rates and the USD index are a grim cocktail that increases the risks of correction of world stock indices. Second, devaluation and rising oil prices increase the likelihood of accelerating inflationary expectations, which reduces the purchasing power of competing currencies. Third, the desire of local central banks to support their rates through interventions results in the sale of assets, i.e. worsening financial situation of the issuing country. The pound, of course,complies with the general trend of the US dollar strengthening, but it affects it to a lesser extent than on the yielding currencies.

The Bank of England could not throw a lifebuoy to the sterling at its May meeting. It was rather curious to observe the contradictions in its decisions. If you believe that the slowdown in the GDP of the Foggy Albion in the first quarter is temporary, then why reduce the forecast from 1.8% to 1.4%? If you lower the estimate of economic growth, then why announce that the rates will be raised this year? It seems that BoE is trying to make the best of a bad bargain. While inflation is above the target, economic expansion has lasted 9 years, and the labor market is in a better shape over the past more than 40 years, it's unclear why the regulator is lingering about the normalization of monetary policy?

It is interesting that the experts interviewed by Bloomberg are in solidarity with the central bank and believe that Britain's GDP will grow by 1.4% in 2018. Almost 60% of them expect an increase in the REPO rate in August. The futures market estimates the probability of such an outcome at 50% and expects a monetary restriction in November (85%). Thus, no one says that the Bank of England has abandoned the idea of ​​normalization.

Dynamics of UK GDP forecasts

Source: Bloomberg.

As for the continuously disappointing statistics, in the second quarter the situation can change radically. The Citigroup economic surprise index is cyclical. Its fall to the lowest levels since 2012 forces Bloomberg experts to issue modest estimates to indicators, as a result, the risks are high that the actual data will be better than forecasted.

Dynamics of theeconomic surprise index in Britain

Source: Bloomberg.

In my opinion, if inflation in Britain starts to accelerate, as evidenced by its consensus estimate for April (2.7% versus 2.5% in March), the chances of an increase in the REPO rate in August will start to grow, which will allow the GBP/USD bulls to launch a counterattack upon breakout of the resistance at 1.3615-1.362.

Pound is a bear hunter

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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