In early November, the Fed and the Bank of England sent clear statements to the markets. Don't underestimate the potential for higher federal funds rates. And there is no need to overestimate the peak values of the repo rate. Different rates of monetary tightening seemed to convince investors that the GBPUSD pair has decided on the direction of further movement. It must go down. Alas, the market reaction to the US employment data for October turned everything upside down.

After Rishi Sunak replaced Liz Truss as prime minister, the risk of a mismatch between fiscal and monetary policies disappeared from the pound, causing the GBPUSD to soar from 1.04 to 1.16. Speculators significantly reduced their bearish rates on sterling, but after the Bank of England became the focus of investors' attention, the sellers got down to business again.

Dynamics of speculative positions on the pound

Despite the increase in the repo rate by 75 bps to 3%, which was the BoE's widest move since 1989, Governor Andrew Bailey, at a press conference, preferred "dovish" rhetoric. According to him, market expectations of the borrowing cost ceiling are too high, while the UK economy is already in the deepest recession since 1990. Chief Economist Huw Pill confirmed his opinion a little later. Pill noted that rates will certainly continue to rise, but not to 5.25%, as expected by the futures market.

The BoE is obviously trying to slow down sterling fans by all means. And their statements about the recession have the same purpose. At first glance, rumors of a recession spread by the regulator are counterproductive because, in such conditions, households can restrain spending, and enterprises can slow down investments. On the other hand, if the recession finally makes itself felt, the Bank of England may pause in the process of tightening monetary policy, explaining this by implementing its own plans.

Dynamics of recessions in the UK economy

Thus, despite the decisiveness shown in November in the form of a 75 bps increase in the repo rate, Bailey and his colleagues are moving towards gradualism, which, on paper, should support the GBPUSD bears. Especially in conditions when the Fed is ready to raise the cost of borrowing to almost 5.25%.

Monetary policy divergences allow large banks and investment firms to hold negative views on sterling. Thus, Mitsubishi UFJ, Deutsche Bank and Rabobank predict that it will fall to $1.1 or lower. To their dismay, the collapse of the US dollar in response to the seemingly strong statistics on the US labor market was a real blow to the plans. In the coming days, the market will decide what it was: a dead cat bounce or a change in trend.

Technically, on the GBPUSD daily chart, the pair's inability to consolidate above the fair value at 1.135 and within the corrective ascending channel indicates the weakness of the bulls and gives rise to sales in the direction of 1.12 and 1.11.

Relevance up to 09:00 2022-11-12 UTC+1 Company does not offer investment advice and the analysis performed does not guarantee results. The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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