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The GBP/JPY cross pair has recently shown increased volatility. In just two weeks, the pair dropped by a thousand (!) pips. On November 24, the pair marked an 8-year price high at 188.63, while on December 7, bears set a two-month low at 178.63. However, the bearish momentum quickly faded: on Monday, the cross returned to the 184 handle. Such mood swings are solely due to the Japanese yen's behavior, with the pound being the proverbial "dance partner." However, the situation may change very soon: the UK will release its GDP data on Wednesday, and on Thursday, the Bank of England will hold its final meeting for the year. Therefore, it is quite likely that the pound will take the initiative for the pair. The price vector in this case will depend on the dynamics of the UK's economic growth in October and the degree of "hawkishness" or "dovishness" of the British central bank.
According to preliminary forecasts, the GDP is expected to contract by 0.1% in October on a monthly basis and grow by 0.1% on a quarterly basis. The volume of industrial production is also expected to decrease by 0.1% on a monthly basis (the indicator has been in the negative territory for the third consecutive month). In annual terms, a downward trend is also expected—down to 1.1% (after four consecutive months of growth). A similar picture is emerging in the manufacturing sector (0.0% MoM and 1.9% YoY). The construction volume in October is expected to decrease by 0.2% MoM (an annual decline of 1.2% is also forecasted, marking the worst result since May).
As we can see, Wednesday's data does not promise anything good for the pound, even if the main components meet the forecasts. Especially since the key reports will be published ahead of the BoE's December meeting.
On the one hand, the market is certain that the BoE will keep all parameters of monetary policy unchanged. No one is expecting another rate hike. And although the market hypothetically considered such a scenario in the fall, BoE Governor Andrew Bailey effectively denied any hawkish intentions last week. According to him, the current rate "works well," and in determining the further prospects, the Bank will take into account the cumulative amount of monetary tightening and the lagged effects of monetary policy. In addition, Bailey mentioned the side effects of tight monetary policy and the risks to financial stability that may arise in the foreseeable future (here he again expressed concern about the state of the Chinese economy, calling it a "key uncertainty").
Therefore, the question of tightening monetary policy is effectively off the table, especially against the backdrop of the latest UK inflation data. The Consumer Price Index (CPI) sharply dropped to zero on a monthly basis, and on an annual basis, it fell below the forecast level, reaching 4.6% (the weakest growth rate since October 2021). The core CPI in October dropped to 5.7%, the slowest growth rate since March 2022.
The intrigue of the December meeting lies in whether the BoE is ready to discuss a rate cut, its timing, and the conditions for such a move. If the central bank voices such considerations, the pound will come under significant pressure.
Goldman Sachs sees the first 25-basis-point reduction in the third quarter of 2024, specifically at the August meeting. Similar moves are expected to follow at each subsequent meeting. Analysts see the final point of monetary easing at 3.0% (given the announced pace, this target will be achieved by mid-2025).
Most experts agree that the BoE will start easing monetary policy next year. According to the latest Reuters survey, 45% of polled economists predict the first cut in the third quarter. In addition, around 30%, or 20 of 68 economists, predicted the first cut to come in Q2 of next year.
In my opinion, ahead of the December meeting, market expectations regarding the BoE's future course of actions have intensified, considering recent statements and economic data. If the UK GDP report comes out in the "red zone," these expectations may intensify.
Such a situation could work in favor of the British currency if the BoE takes a "moderately-hawkish" stance, stating that the question of a rate cut is not on the agenda, and another round of tightening monetary policy is hypothetically not ruled out. In this case, the GBP/JPY pair may resume its upward movement with 184.20 as the initial target (the upper line of the Bollinger Bands indicator on the 4-hour chart). The market is overflowing with dovish expectations, so there's a high probability the BoE will not live up to its hopes.
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