Like the euro, the pound struggled to lose 0.5% against the dollar. Despite the better-than-expected July UK PMI, it did little to support the pound, further underscoring that the bullish outlook for GBP/USD will be tough.
Like the euro, the pound struggled to lose 0.5% against the dollar. Despite the better-than-expected July UK PMI, it did little to support the pound, further underscoring that the bullish outlook for GBP/USD will be tough. What’s more, the latest YouGov poll shows Truss (62% of votes) ahead of Sunak (38%) in the Conservative leadership race. To some extent, this will add to concerns about the pound, as Truss recently backed the Bank of Japan’s policy to control inflation. The last thing sterling bulls want to hear is rhetoric challenging the independence of the Bank of England in support of the Bank of Japan’s stance.
In addition, the ECB’s decision to announce a larger-than-expected rate hike confirmed to me that the Bank of England will raise rates by 50 basis points at its upcoming meeting. For almost all G10 group central banks to raise interest rates, the Bank of England certainly cannot exceed. Like the general bottoming we saw during previous market shocks, we are now seeing a reversal of monetary policy, so the BoE will also be affected by the policy actions of central banks around it.
Bank of England official Mann, who has voted in support of a 50 basis point rate hike in recent months, has previously said:
“The difference in interest rates between the US and the UK has always favoured the US, and this difference is a determining factor in the financial channel, which is why the bilateral exchange rate tracks the continued depreciation of the pound due to shocks. In order to stabilize prices and ease inflationary pressures from the exchange rate , British policymakers need to roughly go along with U.S. austerity policies. Of course, doing so will exacerbate production declines.”
Markets are hesitant to stick with the Fed
From a technical point of view, GBP/USD has little success above 1.2000, with multiple failures around 1.2045-55, while support lies at 1.1880-90. With our upcoming FOMC meeting next week, market indecision is likely to persist, so range trading is likely in the short term. Elsewhere, GBP/JPY battled both narratives of rising recession risks and the Bank of Japan being an outlier in the outlook for global tightening.
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