On Wednesday, June 7, as Johnson clung to power despite the departure of important cabinet members, the British pound hit a more than two-year low versus the dollar. The majority of commentators claimed that rather than Britain's political unrest, the pound was mostly moving due to larger economic worries about a worldwide recession.
Chris Turner, ING's Head of FX Strategy, remarked: "The market really cements the view that growth is going lower while inflation is going high, stagflationary fears are settling in which is positive for the dollar but negative for growth sensitive currencies like the euro and sterling."
Huw Pill, the chief economist at the Bank of England, also issued a warning that the UK economy will stagnate over the following year and reiterated his preference for a "steady-handed" strategy to raising interest rates.
The "huge effect" of energy shocks, which are reverberating globally but are felt sharply in Europe due to its reliance on Russian oil and natural gas, was repeated by ECB President Christine Lagarde. She also mentioned Europe's proximity to the Ukraine conflict and how "energy was significantly underestimated" in the bank's inflation forecast. Similar happened with the UK’s inflation.
Following the resignation of more than 50 members of his cabinet in the previous 48 hours, British Prime Minister Boris Johnson announced his resignation on Thursday. With the resignations of two key ministers on Tuesday night, the unprecedented uprising against the party head gained momentum.
BOE will continue to raise interest rates
According to Reuters, Catherine Mann, a policymaker at the Bank of England (BOE), observed on Thursday that inflation forecasts in the UK over the next year are quite high.
"High inflation expectations may feed into inflation today. The uncertainty about inflation process strengthens the case for front-loading interest rate rises." – Mann said.
The performance of the British pound relative to its main competitors does not appear to be much impacted by these remarks. The GBP/USD pair was up 0.3 percent daily as of the time of writing.*
Chart 1: GBPUSD, last 5 years, daily chart. (Source: tradingview.com)
As we can see on Chat 1, GBPUSD is on a multi-year support which hold its ground. By looking at Chart 2 we can see divergence, which could mean possible price reversal.
Chart 2: GBPUSD, zoomed Chart 1, daily chart. (Source: tradingview.com)
If we take into account the announced increase in interest rates expected by analysts, and also announced by Bank of England employees, and the current technical analysis, it can be expected that GBPUSD creates a bottom. The value of GBP against the USD could start to strengthen after a long time. [a]
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Overview report prepared by Jozo Perić, Analyst of CapitalPanda
[a] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.
*Past performance is no guarantee of future results.