The pound plunged against the dollar, despite the hawkish results of the Bank of England’s November meeting. The central bank raised the interest rate by 75 basis points, bringing it to the 3% level – for the first time in the last 33 years. The central bank also decided to reduce the amount of bonds on the balance sheet by 80 billion pounds, to 758 billion pounds.
At the same time, the central bank predicted an acceleration of annual inflation in the country in the fourth quarter to 11% and warned of “very difficult prospects” for the country’s economy. The BoE also stated that the UK economy is entering a recession, which theoretically could last one and a half to two years, that is, longer than during the financial crisis that broke out in 2008.
Such gloomy forecasts disappointed GBP/USD bulls, because it is quite obvious that the UK is falling into stagflation. In addition, market participants were alerted by the results of the vote for an increase in the interest rate. Seven out of nine members of the Committee voted for the 75-point option. The rest were in favor of a more moderate pace of monetary policy tightening (one of them voted for a 50–point rate hike, the other – by 25). And although today dissidents are in a clear minority, the very fact of the lack of solidity in the Committee has put additional pressure on the pound.
However, this circumstance is still secondary. The atmosphere of uncertainty and pessimism acts as a heavy anchor for the GBP/USD pair: the BoE has already announced its gloomy verdict, while the newly appointed British Prime Minister Rishi Sunak will announce the government’s new economic strategy on November 17, that is, exactly two weeks later. During this period, the pound paired with the dollar will have to follow the greenback, as it will not have its own arguments for growth in the near future. Even if the current macroeconomic indicators in the UK turn out to be in the green zone, they will be viewed through the prism of the November meeting of the British central bank. The “specter of stagflation” will haunt the British currency.
The dollar, in turn, received support from the Federal Reserve, which just summed up the results of its penultimate meeting this year. The results turned out to be in favor of the greenback – even though Fed Chairman Jerome Powell actually announced a slowdown in the pace of monetary policy tightening. But two factors need to be taken into account here: a) this issue is still debatable – it will be discussed at the December meeting; b) regardless of the chosen rate hike rate, the peak of the current cycle of tightening of the monetary policy will be higher relative to earlier Fed guidelines. And this is by no means an assumption of experts: this was stated by Powell, as they say, in plain text.
And this is, perhaps, the main message voiced by the Fed following the results of the November meeting. The result was not long in coming: the futures market for the federal funds rate began confidently predicting a ceiling above 5% (now the benchmark is in the area of 5.1%-5.2%), the yield of treasuries increased, as did the US dollar index, which updated a two-week high, testing the 113th figure.
In light of these events, a sharp decline in the GBP/USD pair looks quite logical. “Hawk” Powell acted as an ally of the dollar, while the BoE put pressure on the pound with its pessimism. The very fact of a rate hike by the British central bank in this case can be regarded as an “aggravating circumstance”, which in the future will only aggravate the situation of the British economy.
Thus, the fundamental background is in favor of the GBP/USD bears. The pair collapsed by almost 300 points: if in the morning the price was in the area of the 14th figure, now it is trying to settle in the area of the 11th price level.
From a technical point of view, the GBP/USD pair is located in the Kumo cloud on the daily chart, and at the moment it is trying to overcome the intermediate support level of 1.1180 (Kijun-sen line). If the bears push through this target (which is very likely), then the door will open for them to the main price barrier of 1.1010 (the lower limit of the Kumo cloud on the same timeframe). It is likely that GBP/USD will consolidate within the 11th figure ahead of the US Nonfarm, which will be published on Friday. If the key data on the US labor market turns out to be in the green zone, the bears may again take the initiative, impulsively reaching the base of the 10th figure. Corrective growth of the pair is possible only if the greenback weakens – and in my opinion, it is advisable to use any corrective spikes in the pair to open short positions.
The material has been provided by InstaForex Company – www.instaforex.com
