Home Forex Markets The UK economic outlook may limit the Bank of England’s room to raise interest rates, GBP/USD will remain under pressure in the short term

The UK economic outlook may limit the Bank of England’s room to raise interest rates, GBP/USD will remain under pressure in the short term

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Leading economic indicators show that the UK’s economic outlook does not support aggressive interest rate hikes by the Bank of England. The central bank’s interest rate decision next Thursday may conservatively raise interest rates by 25 basis points, compared with the Fed’s extremely hawkish interest rate hike and monetary policy expectations. In the short term, GBP/USD will continue to be under pressure; on the technical side, shorting GBP/USD on rallies is a more reasonable operation.

Bank of England to raise interest rates by 50 basis points?

Both the Federal Reserve and the Bank of England will announce interest rate decisions on Thursday. The Fed is about to start an era of double tightening of volume and price. The market is expected to raise interest rates by 50 basis points and begin to shrink its balance sheet at a rate of $95 billion per month, which is hawkish. The stance has caused investment to shift to holding dollar assets, so what is the outlook for the Bank of England’s monetary policy?

UK interest rate futures are currently priced in that the Bank of England will raise interest rates by 115 basis points until November 2022, and the Bank of England still has 5 interest rate meetings this year.

In addition, at the last (March 17) meeting of the Bank of England on interest rates, among the nine members of the Monetary Policy Committee (MPC), eight members supported a 25 basis point rate hike, and only one supported maintaining interest rates unchanged. . As of March, the Bank of England has raised interest rates three times in a row. The Bank of England may have to raise interest rates for the fourth time in a row, given that UK inflation has risen to 7% and inflation is still likely to rise further. The question is, will the central bank raise rates by 25 basis points or 50 basis points?

According to the Economic Leading Indicator (CLI) released by the Organisation for Economic Co-operation and Development (OECD), the UK’s CLI in March was 100.58, lower than 100.86 in February. In the future, its economic growth may slow down in the next one to two quarters, which shows that the UK’s economic outlook does not support aggressive interest rate hikes by the Bank of England.

On the other hand, in the United States, the CLI of the United States in March was 100.09, higher than 100.06 in February, indicating that the future economic prospects of the United States may still be in a period of expansion, which may continue to support the dollar to maintain its strength and provide space for the Fed to tighten monetary policy.

All in all, given the high inflation, inflation expectations and economic outlook in the UK, the Bank of England is likely to raise interest rates conservatively by 25 basis points at the May meeting. It will continue to be under pressure in the short term.

GBP/USD daily chart

The UK economic outlook may limit the Bank of England's room to raise interest rates, GBP/USD will remain under pressure in the short term

Chart source: IG

On the daily chart, GBP/USD has posted a six-day losing streak and has fallen to the 61.8% Fibonacci retracement level of the March 2020 low/June 2021 high.

From the perspective of technical indicators: the 30-day moving average, the 50-day moving average and the 100-day moving average are running down side by side; the MACD column is far away from the zero axis; the relative strength index (RSI) is in the oversold range. In general, GBP/USD has fallen significantly, and there is still room for decline in the market outlook, but given the current oversold state, the currency may rebound slightly.

The key resistance area above GBP/USD is likely to consist of the previous low at 1.2670 and the 23.6% Fibonacci retracement level of the January high/April 2022 low (1.2726), where the trend of the bulls is showing signs of exhaustion. For example, if the 4-hour RSI enters the overbought range or the K-line reversal pattern appears, you can choose to enter the market and go short; if the trend breaks through this resistance range, GBP/USD may undergo a longer-term correction.

(by Chris Li)

Follow me on Twitter for more exchanges: @ChrisLi865

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