18.08.202210:01 Forex Analysis & Reviews: GBP/USD: the pound "deflated" after the inflation data

The British currency has remained stable for a long time, but reports of off-scale inflation in the country knocked the ground out from under her feet. As a result, the pound has lost some of its positions and is now in the process of recovering them.

After the release of the inflation report in the UK, the pound rapidly collapsed, increasing investors' fears about a possible recession. According to current data, consumer inflation in the country was 10.1% in July, which is the highest level since February 1982. At the same time, experts predicted an increase to 9.8%. Over the past month, core inflation in the UK increased by 6.2% year-on-year, exceeding the expected 5.9%. The double-digit figures shocked market participants who recently evaluated macro data from the United States and have not yet come to final conclusions about further actions.

Against this background, the British currency showed a short-term rise, but then fell by 0.4%, reaching 1.2050. The pound-dollar exchange rate rose to a high of 1.2143 before returning to the level of 1.2100 on Wednesday, August 17. The GBP/USD pair was cruising near the low level of 1.2046 on the morning of Thursday, August 18. According to the forecasts of Scotiabank economists, the pound will remain within 1.2000 by the end of 2022.

According to the July macro data on inflation in the UK, this indicator reached the highest level in the last 40 years. According to analysts, a new 40-year high in inflation means that in September the Bank of England will raise the key rate by another 50 bps. This measure is necessary to curb rising inflation and further economic growth in the country.

The BoE will have to act aggressively and carry out new rate hikes that will support the national economy. At the same time, experts do not rule out the onset of a recession before the end of this year. In the current situation, the pressure on the central bank is increasing. Many analysts believe that the central bank will have to revise the current monetary policy in order to reduce prices. At the same time, the high cost of living and weak economic growth prevent the BoE from resisting rising inflation and meeting market expectations regarding the tightening of the monetary policy.

In such a situation, the prospects for the pound's growth are sharply reduced. According to Scotiabank economists, further inflation growth in the country has a negative impact on the pound. At the same time, inflation is not going to stop, experts emphasize. "No respite is expected in the coming months, as household electricity bills are increasing. At the same time, inflation in the service sector is still maintained due to the stability of the labor market," currency strategists at HSBC Asset Management bank note. In the current environment, British consumers affected by the cost-of-living crisis should not expect the situation to improve. In the near future, namely in October, energy prices will soar again.

Many economists claim the peak of inflation in the EU and the US, but in the UK it is still far away. Recall that annual inflation in the UK has reached double-digit territory, amounting to 10.1%. According to the BoE's forecasts, in October 2022 this figure will grow to 13.3%.

According to current reports, in the second quarter of this year, wage growth in the country amounted to 5.1% in annual terms. At the same time, real wages, adjusted for inflation, decreased by 3.2%. According to analysts, this is a record low over the past few years. As a result, the cost of living in the UK is increasing at a fairly rapid pace and is far ahead of wage growth.

In such a situation, the British currency will be supported by the prospect of a rate hike by the BoE. At the moment, the central bank is considering this possibility. In case of a positive decision, this will ensure high profitability of British monetary assets for foreign investors. According to experts, this is a very important aspect, since recently the investment appeal of GBP was almost at zero. However, high inflation in the country and stagnant economic growth hinder the growth of the national currency. Many analysts doubt the long-term prospects of the pound, although they admit its rise in the future. At the same time, experts warn of possible losses of the British currency against the American one.