GBP Grinding Lower
The British Pound is back under heavy selling pressure again this week, extending its recent run of losses as a stronger US Dollar continues to weigh on GBP. The currency has been one of the worst performing this year, weighed on by a number of issues, many of which look set to keep price anchored lower across the remainder of the year.
Perfect Storm
It’s been something of a perfect storm for GBP with the fallout of the Russia-Ukraine war, ongoing COVID disruptions, Brexit-linked difficulties, surging inflation, tighter monetary conditions and political uncertainty each combining to send investor sentiment plummeting.
Gas Price Nightmare
In terms of the greatest risks to the UK currently, rising gas prices (and their inflationary knock-on) are taking the lead as winter approaches. With news this week that Russia has temporarily suspended its Nordstream gas supply to Europe for three days (for maintenance), fears of further disruption in the coming months are likely to keep gas prices at elevated levels.
Inflationary Spiral
The UK economy is already reeling from the inflationary surge of the last six month and there are fears over how households will manage the winter months, given the spike in energy prices. The surge in energy costs has been one of the driving forces behind the record uptick in inflation in the UK. CPI was seen hitting 10.1% last month, putting extra pressure on the BOE to hike rates further. Current rates market pricing suggests BOE rate hikes will top out at 4% next year, suggesting higher rates in the UK than in the US.
UK Growth Forecasts Falling
However, the BOE’s tightening program is taking a toll on UK growth forecasts. Given the political uncertainty we are seeing currently amidst the change in Tory leadership, these fears are driving capital out of the UK and elsewhere. Along with the BOE taking action against inflation, the government has been forced to provide support for those struggling with the cost-of-living crisis, particularly energy payments, via a new £37 billion package announced in May.
Fiscal Stimulus A Double-Edged Sword
Both candidates in the Tory leadership race have announced plans for further measures later in the year given that energy prices are now running above the forecasts made in May. While this will no doubt be welcomed by UK households it might end up stoking inflationary fires, putting even more pressure on the BOE to hike more aggressively. With this in mind, the coming months will be key for the UK economy and GBP alike as the BOE attempts to navigate very tricky territory. As such, it will likely take a significant shift in the narrative and a healthy upside surprise to help lift the beleaguered Pound.
Technical Views
GBPUSD
The sell-off in GBPUSD this year has seen the market grinding lower within a clear bear channel. Despite attempts in July and early August to breakout, that rally quickly fizzled out and price has since broken down to fresh 2022 lows, trading below the 1.1764 level. With both MACD and RSI bearish, the focus is on further downside near-term with 1.1474 the next support level to note.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.