After a series of raising interest rates by the Federal Reserve to combat inflation, forex traders wondered how the Bank of England would respond. And there is something to respond to, as inflation is also a thing in the UK. For now, the different approach to monetary policies is doing a good job, resulting in the strengthening of the pound. There is, as usual, a downside to it, so let’s take a closer look.
Just like all risk assets, the pound is supported by the decline of the dollar price, which has been facing significant pressure from national macroeconomic statistics for more than a year. The GBP/USD pair shows active growth, testing the psychological resistance at 1.3000 and updating the local highs since April 2022. Since the beginning of the year, it has gained almost 8% against the US dollar.
Since the start of 2023, the US dollar index has been losing 0.65%., and the dollar itself weakened by 1.4% in June. The US Consumer Price Index (CPI) rose 0.2% in June, which was below the forecast of 0.3%. The annual rate fell from 4% to 3%, hitting its lowest level since March 2021. Core inflation also fell from 5.3% in May to 4.8% in June, against a forecast of 5%.
In addition to the weak dollar, the semi-annual report evaluating the state of England's financial system also contributed to the growth of the British currency. It showed the stability of the national economy, which was once again proved by increasing profits of major British banks. Not to mention the growth of average wages, excluding bonuses, to a record high of 7.3% in three months.
At the same time, however, consumer prices experienced an increase of 8.7 % in May. In comparison, in Europe, this rate stood at 5.5%. And the UK will probably continue to raise borrowing costs as long as Britain's economy can withstand it, while the Fed is expected to put the rate hike on hold till the end of this year.
But for now, the prospect of further tightening of the national monetary policy in the US and the unexpectedly stable performance of the British economy will continue to act in favor of the GBP/USD pair, which may target growth above 1.3500.
This article was written in cooperation with TradingView.