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The British currency had a strong start to the week. However, later on it slowed down considerably. The reason for this is mixed macroeconomic statistics that raise concerns about the near-term outlook for the British economy.
On May 25, the pound faced downward pressure following the publication of the UK PMI. The current macroeconomic data showed a sharp slowdown in business activity in the country. Against this backdrop, fears that the UK economy will slip into recession by the end of 2022 have intensified. According to reports provided, the UK Manufacturing PMI fell to 54.6 points in May from 55.8 points recorded in April. Experts thought the figure would drop to 54.9 points.
Analysts estimate that weak macroeconomic data is the first step towards the Bank of England's imminent tightening of monetary policy. According to economists at Commerzbank, the unfavorable economic backdrop is contributing to a further drop in sterling.
The decline of manufacturing in the UK, particularly in services, has come as a nasty surprise to markets. Experts have recorded a reduction in the positive economic effects following the end of the coronavirus restrictions. Instead, there has been a marked appreciation of basic goods and a reduction in consumer spending.
Experts estimate that if the British economy faces problems and negative news become more frequent, the market will revise its expectations on rates. Such a scenario would put serious pressure on the pound, experts say.
This position is supported by HSBC economists. They are dovish on the Bank of England's tightening of monetary policy. Currency strategists expect GBP/USD to decline in the near term. Notably, earlier this week, the pair rebounded from the round level of 1.2600 and collapsed sharply. On May 24, the Pound hit new lows, falling below the psychologically significant level of 1.2500. On May 25, GBP/USD was hovering near 1.2536, trying to move higher.
According to preliminary estimates, sterling will trade in a range of 1.2430-1.2600 in the coming weeks. According to currency strategists at UOB Group, a breakout of the strong support level of 1.2480 indicates a decrease in pressure on the pound. Experts see a further strengthening of the GBP, but for this to happen, GBP/USD needs to consolidate above 1.2600.
An additional pressure factor for the British currency is the difficult relationship between the UK and the EU. The reason for this has been the slowdown in negotiations on the Northern Ireland Protocol. At the moment, the parties have not reached a mutual agreement. Beneficial trade relations also seem to be under discussion.
Against this background, the GBP is expected to weaken against the greenback in the near future. However, the Bank of England will remain focused on a gradual tightening of its monetary policy amid growing economic uncertainty. Analysts expect a gradual rate hike by the Bank of England (by 25 bp at the meeting on June 16) and a single rate hike in August. In combination, this will lead to a rate hike to 1.50%, after which a long pause is possible. This scenario contrasts with market expectations which are pricing in a continuation of the tightening cycle in 2023 and a rate hike to almost 2.50%. Such actions undermine the pound's momentum, complicating its near-term prospects.
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