GBP/USD Price Forecast: Sterling Stunned by Worrying Inflation Forecast

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GBP/USD NEWS AND ANALYSIS

• Sterling bounce back has been less pronounced than its peers – GBP vulnerable
• GBP/USD failed to take advantage of temporary USD weakness, retest of yearly low in sight
• Institutional and retail positioning analyzed as speculators reduce GBP short exposure

 

STERLING BOUNCE BACK LESS PRONOUNCED THAN ITS PEERS, GBP VULNERABLE

The recent dollar weakness offered an opportunity for a countertrend reprieve among risk assets. We’ve witnessed a fairly decent pullback in the S&P 500 along with other global equities and even a number of FX pairs such as AUD/JPY and even EUR/USD to a degree. However, sterling failed to take advantage of the weaker dollar, trading only slightly higher than the recent low, underscoring the vulnerability of the pound.

On Monday this week, economists from Citibank forecasted that UK inflation is likely to reach around 18%, which is significantly higher than the Bank of England’s upwardly adjusted 13.3% in October. Complicating the matter further is the fact that markets anticipate a further 160 basis point rise in interest rates compared to 127 basis points from the Fed into year end. the BoE anticipates that the UK economy will fall into recession in the fourth quarter of 2022, meaning it will essentially be hiking into an extended economic contraction.

Should initial US jobless claims trend around 250K and the Fed continue their hawkish narrative throughout the Jackson Hole event, cable remains vulnerable.

For more on this article visit: Aug 25, 2022 | DailyFX
Richard Snow, Analyst