- As March trading draws to a close, the British pound has stabilized around the $1.26 level, poised for a quarterly decline of 0.7% against the US dollar.
- This is amidst cautious signals from the Bank of England due to indications of gradual easing of inflation and economic weakness.
- In its March meeting, the Bank of England kept interest rates unchanged at 5.25% and maintained its inflation and growth forecasts.
Recently, the GBP/USD pair is stable on a downward trajectory around the support level of 1.2615 at the time of writing, ahead of a bundle of crucial economic data from both Britain and the United States.
In the recent Bank of England meeting, two policymakers who had previously advocated for a rate hike shifted to a neutral stance, leading the central bank's decision towards a more pessimistic outlook than expected. Consequently, this prompted speculation that the Bank of England might be the first among the three major central banks, including the Federal Reserve and the European Central Bank, to implement interest rate cuts. However, Catherine Mann, a policymaker at the Bank of England, warned on Tuesday that financial markets are pricing in excessive interest rate cuts this year, suggesting that the UK is unlikely to move before the US Federal Reserve.
Future outlook for the British economy...
A new analysis suggests that inflation in the UK Consumer Price Index will drop to less than 1.0% and remain below the Bank of England's 2.0% target until 2025, increasing the risk of contraction in the UK. Capital Economics, an independent research firm, says that Britain is on the brink of transitioning from a problem of higher inflation than other major economies to a larger problem of low inflation. Paul Dales, chief UK economist at Capital Economics, says, "We believe that inflation in the UK Consumer Price Index will drop to just 0.5% later this year, and there is a risk of contraction."
These forecasts come after the UK's inflation report for March came in below expectations, putting the Bank of England on course to cut interest rates in the summer. According to the Office for National Statistics, inflation in the UK Consumer Price Index rose by 3.4% in the 12 months to February 2024, down from 4.0% in January and lower than the expected 3.6% by consensus.
According to the analyst, “We expected a year ago that the inflation rate in the British Consumer Price Index would fall to less than 2.0% next April, from 3.4% in February, and most other forecasters now agree with this opinion.” Added, “This would leave inflation below target for the first time in three years. But there is no consensus, yet that inflation may fall to just 0.5% later this year.”
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If these forecasts hold true, the Bank of England will cut interest rates further than markets currently expect, with far-reaching consequences for UK lending rates, bond markets, and the pound. Markets are currently priced in at around 75 basis points of cuts in 2024, but this will rise if Britain approaches a contraction scenario. The British pound, supported by expectations that the Bank will cut rates less than its major counterparts, is likely to come under significant pressure. (Naturally, the pound's direction will depend on whether this deflationary phenomenon repeats elsewhere).
Ultimately, Capital Economics explains that the decline in inflation is partly due to further declines in wholesale gas prices, which will mean that utility prices will continue to discount up to 1.0 percentage point from Consumer Price Index inflation. In response to the decline in global agricultural commodity prices over the past two years, Capital Economics expects that food price inflation will not add anything to inflation and may turn negative later this year for the first time since July 2021.
GBPUSD Expectations and Analysis Today:
According to the performance on the daily chart attached, the price of the British pound against the US dollar GBP/USD is still moving amid a bearish tendency. As mentioned before, the move towards the 1.2600 support level will remain important for more bears’ control over the trend and thus prepare for stronger losses. Especially, if the results of the economic calendar come in, today is in favor of further gains for the dollar. Therefore, the most important support levels following the current downward shift may be 1.2550 and 1.2470, respectively, and from the last level, the technical indicators will begin to give oversold signals. On the other hand, resistance will remain at 1.2775, the beginning of the opposite of the current view.
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