By the end of this week, the pound sterling drifted lower. It lost its early gains in anticipation of the Bank of England meeting. However, it may resume steady growth following the BoE's key rate decision.
Today, the pound sterling reached a new 37-year low against the greenback amid geopolitical tensions that fueled demand for safe-haven assets, especially the US dollar. The GBP/USD pair has fallen to its lowest level since 1985, touching a critically low level of 1.1235. On Thursday morning, the GBP/USD pair was trading at 1.1226. Shortly after, it was fluctuating in the range of 1.1300 -1.1400.
Analysts at Scotiabank believe that the GBP/USD pair could extend more losses in the medium term. Now, the pound sterling is weakening due to risk aversion. Traders are flocking back to safe-haven assets, especially the US dollar. Besides, the greenback is rising across the board. The pound sterling will eventually recover yet its growth will be unsteady.
Investors are now anticipating the upcoming meeting of the BoE, scheduled for September 22. According to Reuters, a chance of a 75 basis point rate hike totals 75%. Analysts reckon that this is the most appropriate size of the rate hike. The Bank of England is widely expected to take decisive action against inflation.
Some analysts assume that the regulator may raise the interest rate by another 125 basis points at the next two meetings before the end of 2022. Currently, it stocks to a dovish stance. The watchdog is reframing from switching to aggressive tightening. For this reason, some economists criticize the regulator for a slower response to inflation and monetary policy adjustments.
According to FX strategists at Barclays Bank, it is pushing the pound sterling down. To facilitate its growth, the central bank should raise the benchmark rate more aggressively. This move may help revive demand for the British currency. If the BoE hikes the cash rate by 100 basis points instead of an expected 75 basis point increase, the pound sterling will rise sharply, analysts at Barclays stated.
Market participants are also concerned about the possibility of a recession following the release of the UK's fresh macro stats. Retail sales contracted by 1.6% in August compared to a 0.4% increase in July. On an annual basis, this indicator sank by 5.4%, logging the worst performance since 2008. At the same time, in August, the budget deficit stood at £11.8 billion ($ 13.38 billion) amid the rising cost of servicing government debt. According to the Office for National Statistical (ONS), since April 2022, British public borrowing has amounted to £58.2 billion, a decrease of £21.4 billion compared to 2021.
Earlier, the BoE repeatedly warned about the high risks of a recession in the fourth quarter of 2022. According to experts, it may begin to subside no earlier than 2024. At the same time, some analysts revised upward their outlooks for inflation in the UK amid the adoption of the Energy Price Guarantee. In August, the Bank of England predicted that inflation would peak at more than 13% in October. Yet, the reading, on the contrary, declined. Therefore, analysts recommend holding short positions on the GBP/USD pair with the target level of 1.1250.