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Pound’s growth contains a downward reversal

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Relevance up to 06:00 2022-01-23 UTC+00

Experts found signs of a downward movement in the dynamics of the British currency, which rapidly increased after the publication of economic data in the country. Analysts say that a potential reversal to low values will create a price fluctuation for the pound.

At the end of 2021, the pound rose intensely after the Bank of England’s interest rate hike. This year, the British currency tried to stay in an upward trend, acting with varying success. Analysts are afraid of negative changes in the dynamics of the pound, which the British regulator is able to influence. The revision of the current monetary policy is possible after the release of disappointing macro data on the UK economy.

According to reports from the Bureau for National Statistics, the UK CPI increased by 5.4% in December 2021 year-on-year against the forecast of +5.2%. As for the indicator fixing the inflation rate for the month, it was 0.5%, although analysts assumed its growth would not exceed 0.3%. The UK’s core inflation rate also surged by 4.2% year on year, despite the forecast of 3.9%. According to experts, these indicators showed a maximum since 1992, which surpassed the peak values of 2008 and 2011.

The pound’s confident growth started after the report on extremely high inflation in Great Britain. However, experts are worried that the unexpected acceleration of inflation will provoke an unplanned tightening of monetary policy by the Bank of England. There are prerequisites for this, but it has not yet reached a critical point. For the regulator, they are like additional trump cards that need to be used when other measures do not help.

The current situation puts pressure on the pound, stimulating it to paradoxical actions. On the one hand, it has grown significantly after the macro data on the UK economy, and on the other hand, it is close to a downward reversal. On Wednesday, the British currency showed signs of decline, although it held steady. On Thursday morning, the GBP/USD pair was near the level of 1.3626, steadily gaining momentum.

The Fed’s tightening of the monetary policy also contributes to the downward reversal of the pound. According to experts, the formation of this reversal may follow the scenario implemented in October 2021. It can be recalled that the GBP/USD pair was in the “third wave” reversal pattern during this period. Currently, only the first downward wave has been formed, and the second one is still far away. Specialists recommend waiting for the pound to rise for two days, and when it updates the lows, short positions can be opened.

The uncertainty on the labor market data in the country serves as a negative factor for the further dynamics of the sterling. According to the UK employment report, the unemployment rate in the country has declined, but job growth has slowed significantly. The situation with the prices of British manufacturers has also exerted pressure. According to the data on business activity in the country, prices in the manufacturing and services sectors were at record highs.

Experts have recorded an acceleration of consumer inflation in the UK along with the calming down of producer prices, which indicates a downward reversal. Last month, the purchase prices of British manufacturers fell by 0.2%, although a rise of 0.6% was predicted. In December 2021, manufacturers’ selling prices also increased by 0.3%. The slowdown of this indicator was recorded for the first time since September 2020.

According to analysts, the contribution of producer prices to inflation in the country is gradually decreasing. This is facilitated by a correction in the commodity market. Uncertainty in the current situation and in the future dynamics of the GBP brings an increase in wages with a decrease in the number of jobs. Experts believe that the Bank of England expects a fight against rising wages in the country. It is possible that an unscheduled rate increase will be required to normalize the situation. However, they also warn that this could be a strong blow for the financial market and for the pound.

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