Pound is moving to the upside, supported by peak rate sentiment
Pound Sterling Currency Report -November (Monetary Policy update)
Derbyshire, UK – November 2nd, 2023: This is the currency report for the Pound Sterling and is intended to be a reference aid for your own analysis and trade planning. The next update will be after the GDP report on Friday, November 10th.
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Pound is moving to the upside, supported by peak rate sentiment
The UK economy is rebounding, but growth is expected to remain low in the near term, with recession risks still present. Inflation is expected to continue to fall, but it is likely to remain above the Bank of England's target of 2% for some time. Unemployment is expected to remain stable, but the cost of living crisis is putting significant pressure on consumers' spending power.
The pound is under selling pressure due to concerns about UK growth and the Fed being close to the end of its hiking cycle. Upside moves towards 1.233 are possible if market sentiment focuses on the slowing US economy, but downside moves towards 1.203 are possible if the US economy outperforms expectations or inflation remains high.
The Bank of England is expected to hold interest rates at 5.25% for a sustained period, although small cuts are beginning to be priced in for late 2024.
Overall, the economic outlook for the UK is mixed. Policy makers will need to manage the economy carefully through this difficult period, particularly as the cost of living crisis continues to weigh on consumers and businesses.
Pound and dollar under selling pressure
GBP/USD made a marginal loss in October, falling less than half a percent and indicative of both currencies coming under selling pressure. Pound sellers are concerned about UK growth, while dollar sellers evaluate the Fed being close to, or at the end of its hiking cycle.
Upside moves towards 1.233 are possible if market sentiment focuses on the slowing US economy and leads investors to believe that the Fed may cut sooner. The long-term resistance level is in the 1.32 area.
Downside moves towards 1.203 are possible if the US economy outperforms expectations and, or inflation remains high. The long-term support level is in the 1.16 area.
The UK stock market index (FTSE 100) has been trading sideways, indicating an indifferent outlook. However, the FTSE has recently started to turn higher, bouncing from the 7,300 level.
The yield on UK six-month gilt bonds has also been slowly trending lower, indicating a slightly pessimistic outlook.
The Bank of England decided to maintain interest rates at 5.25% in November 2023. This decision was influenced by a number of factors, including inflation and economic growth. The MPC expects inflation to return to the 2% target by the end of 2025, but the risks to the inflation projection are skewed to the upside. Therefore, the MPC decided to maintain a restrictive monetary policy stance.
Interest rates held to avert risk of recession
The nine members of the Bank of England's Monetary Policy Committee (MPC) set monetary policy, including the bank rate (interest rate). The bank rate is the interest rate that banks pay to borrow money from the Bank of England overnight and is secured by Gilt bonds. This rate affects the interest that banks charge their borrowers.
The MPC meets to set monetary policy eight times a year, the latest was November 2nd and the next is on December 14th.
The interest rate of the UK was held at the November meeting after being held in September although it had been hiked throughout most of 2022 and 2023. This indicates that the Bank of England is on a cautious but hawkish path. Trading Economics forecast 5.25% to be the peak rate and 2024 to see cuts of 0.25% (prev. 0.75%).
Key points of the Bank of England's MPC meeting:
Maintain the bank rate at 5.25%.
Expects inflation to fall sharply in the coming quarters.
Risks to the Bank's inflation projection are skewed to the upside.
Will tighten monetary policy further if necessary.
Sources: The Bank of England, Trading Economics, FXStreet
Optimistic Economic Outlook for Q4
The Bank of England's Monetary Policy Committee (MPC) makes economic forecasts four times a year. The most recent was at their November meeting and they will be updated in February.
Annual GDP has a pessimistic outlook compared to the MPC’s forecast and although is not likely to contract, the longer-term slow down is a risk.
Annual CPI has an optimistic outlook compared to the MPC’s forecast and is on track to come in below expectations although the rate hold may have put that in jeopardy.
Unemployment has a slightly pessimistic outlook compared to the MPC’s forecast although it is still historically low.
The Bank Rate is likely to be held at 5.25% for a sustained period although small cuts are beginning to be priced in for late 2024.
The UK economy is rebounding, but recession risks remain while the growth outlook remains low as inflation continues to fall along with retail sales while unemployment remains stable.
The economic outlook is mixed and policy makers will need to manage the economy carefully through this difficult period.
Slowing economy falls has a slight rebound but signals recessionary risk ahead
The UK GDP monthly rate report measures the change in value of goods and services produced in the UK over a given month compared with the previous. The latest data covers the August period and was published on October 12th by the Office of National Statistics and the next version is out on November 10th.
The latest result of 0.20% matched expectations and signals that the economy is in recovery as it is higher than the previous month's contraction and above the baseline trend.
Trading Economics are forecasting 0.1% for Q4 which would be above the baseline trend of 0.0% and suggest indifference with regards to economic growth.
Sources: Office for National Statistics, Trading Economics, FXStreet
Falling inflation halts and applies indifferent pressure to growth
The UK inflation rate report measures the change in value of a basket of goods and services in the UK over a given month compared with the previous. The latest data covers the September period and was published on October 18th by the Office of National Statistics and the next version is out on November 15th.
The latest result of 6.70% was just above expectations and signals that the falling rate of inflation is reversing as it matches the previous month and is just above the baseline trend. This applies indifferent pressure to the economic outlook as demand stabilises.
Trading Economics are forecasting 4.5% for Q4 which would be far below the baseline trend of 6.1% and suggest optimism with regards to a speedier pace of falling inflation.
Sources: Office for National Statistics, Trading Economics, FXStreet
Falling retail sales quickens and applies significant bearish pressure to growth
The UK retail sales report measures the change in value of aggregated retail goods and services sales over a given month compared with the previous. The latest data covers the September period and was published on October 20th by the Office of National Statistics and the next version is out on November 17th.
The latest result of -0.90% was far below expectations and signals that the falling rate of retail sales is picking up pace as it is a very sharp fall from the previous month and far below the baseline trend. This applies bearish pressure to the economic outlook as consumers spend less.
Trading Economics are forecasting -2.0% for Q4 which would be below the baseline trend of -0.3% and suggest a lot of pessimism with regards to a rebound of falling sales.
Sources: Office for National Statistics, Trading Economics, FXStreet
Stable unemployment remains steady and applies indifferent pressure to growth
The UK unemployment rate report measures the number of people actively looking for a job as a percentage of the labour force over a given month. The latest data covers the August period and was published on October 24th by the Office of National Statistics and the next version is out on November 14th.
The latest result of 4.20% was just below expectations and signals that the stable rate of unemployment continues as it is similar to the previous month and the same as the baseline trend. This applies indifference to the economic outlook as businesses maintain employment levels.
Trading Economics are forecasting 4.4% for Q4 which would be just above the baseline trend of 4.3% and optimism with regards to a stable labour market.
Sources: Office for National Statistics, Trading Economics, FXStreet
The cost of living crisis in the UK is putting significant pressure on consumers' spending power. The combination of high inflation, the COVID-19 pandemic, the Russia-Ukraine war, and Brexit is driving up the prices of essential goods and services, while household incomes are stagnating or even falling.
This is having a negative impact on consumer confidence and spending. Recent surveys show that a large majority of UK adults are worried about the rising cost of living, and many are cutting back on their spending. This is likely to lead to a slowdown in economic growth in the coming months and quarters.
The cost of living crisis is also having a negative impact on the value of the pound. High inflation and slow economic growth are making the pound less attractive to foreign investors. Additionally, the uncertainty caused by the war in Ukraine is also weighing on the pound.
Cost-of-Living crisis pressures consumers spending power
Since late 2021, the prices for many essential goods in the United Kingdom have been increasing faster than household incomes, resulting in a fall in real incomes. This is caused by a combination of factors, including rising inflation, the COVID-19 pandemic, the Russia-Ukraine war, and Brexit.
Recent Key Events
April-May 2022: 77% of UK adults report feeling worried about the rising cost of living, and 50% say they worry "nearly every day". 52% of respondents to an ONS survey say they have cut back on their energy use.
June 2022: Inflation rises sharply, affecting a wide range of goods and services, including transport, food, furniture, household items, electricity and clothing. Consumer confidence falls to its lowest level since 1974.
November 2022: Nurses and other NHS medical personnel vote to strike over failing wages, inflation, overwork and underfunding. Business investment falls and GDP declines.
December 2022: The Joseph Rowntree Foundation reports that over 3 million low-income UK households cannot afford to heat their homes. Shoplifting increases by 22%.
September 2023: Birmingham City Council, the largest local authority in Europe, declares itself effectively bankrupt.
The cost of living crisis is putting downward pressure on the value of the pound. This is because the crisis is leading to higher inflation, which makes the pound less attractive to foreign investors. Additionally, the crisis is reducing economic growth, which also makes the pound less attractive.
Russian invasion of Ukraine adds uncertainty
On February 24, 2022, Russia invaded Ukraine in an escalation of the Russo-Ukrainian War which began in 2014. The invasion is the largest military conflict in Europe since World War II and has resulted in tens of thousands of casualties on both sides. The invasion has also caused a humanitarian crisis, with millions of Ukrainians displaced from their homes. The international community has condemned the invasion and imposed sanctions on Russia. The International Criminal Court is investigating possible war crimes and crimes against humanity committed by Russian forces.
Recent Key Events
June 2023: The Ukrainian counteroffensive in June 2023 made significant progress, with Ukraine liberating villages and reclaiming territory in the eastern Donbas region. The Wagner Group's rebellion against the Russian government was a major setback for Russia.
August 2023: Ukraine counteroffensive slowed by millions of mines laid by Russia. Ukrainian drones damage the Russian landing ship Olenegorsky Gornyak.
September: An attack on Russian naval targets in Sevastopol damages the Black Sea fleet. Several oil and gas drilling platforms on the Black Sea held by Russia since 2015 have been retaken.
The war in Ukraine is having a negative impact on the global economy, including the value of the pound. The war has caused energy prices to soar and disrupted supply chains, which are putting upward pressure on inflation and weighing on the UK economy.
Gavin Pearson
Retail trader since 2008
Specialises in forex G7 currencies
Funded account from the5ers.com
Member of the eToro Popular Investors Program
Regular contributor to FXStreet.com analysis and education pages
Returned 27% in 2022 and 5.8% in 2023 H1
Forex focused
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