Pound Sterling (GBP/USD) Weekly Fundamental Forecast: Bearish
- UK Inflation headlines next week’s major risk events as growth outlook restricts the length and magnitude of the BoE’s rate hike path
- The Northern Ireland Protocol issue is back in the foreground following elections to the Northern Ireland Assembly and the EU’s latest proposal
Source: TradingView, prepared by Richard Snow
UK Inflation Data Could Extend the Pound’s Woes
The May 5thBank of England (BoE) meeting delivered a 25 basis point hike – with one third of the committee preferring a 50 basis point hike – still managed to be perceived as dovish. That was of course due to the great concern from the Bank regarding a decline in growth in the months to come. Those fears have already materialized via the March GDP data which revealed a month-on-month contraction of 0.1%. In the Bank’s latest forecast, GDP growth is anticipated to zero out in Q2 of 2023 and turn negative towards the end of next year before recovering into 2024.
The current environment of hiking into weakness, referred to as “walking a narrow path” is certainly not ideal but has been justified by the BoE in the face of persistent rising inflation. Next week we have UK CPI data on Wednesday which could see a rather unconventional response to an upward surprise in inflation. Typically, a higher-than-expected print is positive for the related currency as it assumes a higher future interest rate which markets begin to price in right away. However, for the UK, higher inflation exacerbates the existing cost-of-living squeeze during a period of contracting growth which could result in a bearish continuation of GBP/USD prices.
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Market expectations agree with the current BoE stance of moderate interest rate hikes over the coming periods with 25 basis points expected at the June meeting while falling just short of another 25 basis point hike in August.
Implied Rate Hikes via UK Money Markets
Source: Refinitiv, prepared by Richard Snow
UK Rejects the EU’s Latest Proposal Regarding the NI Protocol
Earlier this week the EU submitted a proposal that it argued reduces paperwork and checks on goods entering Northern Ireland from the UK. The UK government however, commented that the proposal would “worsen the current trading arrangements”.
Risks of triggering Article 16 surfaces once more as Foreign Secretary Liz Truss released a statement on Tuesday outlining her preference for a “negotiated solution” but drew a hard line adding that she would not rule out, “taking action to stabilize the situation in Northern Ireland if solutions cannot be found”.
The dissatisfaction around the NI protocol was thrust into the limelight this week after elections to the Northern Ireland Assembly took part last week and could add to the already deteriorating fundamental outlook for both the euro and the pound.
— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX