Sterling is the most vulnerable to a deep correction as there was nothing positive in the most recent Bank of England Quarterly Inflation report and monetary policy announcement. The central bank voted 6-2 to leave interest rates unchanged, cut their forecasts for GDP and wage growth and expressed concerns about a “smooth transition to a new economic relationship with the EU.” Governor Carney said the bank’s forecast revisions factor in “uncertainty about the eventual shape of the U.K.’s relationship with the EU, which weighs on the decisions of businesses and households and pulls down both demand and supply.” They also felt that the weaker GBP was the only reason why inflation was hotter in the beginning of the year and the recent reversal should ease price pressures. As BoE member Broadbent pointed out, U.K. inflation is nearing its peak. Carney also sees growth picking up later on investment and trade with the economy supply capacity rising at a modest rate but their forecasts are predicated on the first rate hike happening in Q3 of 2018, which is too far out for a market that was hoping for a move this year. The disappointment that came out of the central bank meeting overshadowed the stronger PMIs. Given how much GBP/USD rose in the last 4 months (from 1.24 to 1.3250), the tone of the central bank and the healthy U.S. non-farm payrolls report means 1.3270 is most likely the top in GBP/USD.
Next week’s industrial production and trade balance reports are not significant enough to change the market’s appetite for sterling.
Next week’s industrial production and trade balance reports are not significant enough to change the market’s appetite for sterling.
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