Sterling Pound (GBP) Problems: Weak Macroeconomic Data, Rising Inflation And The Threat Of Recession

GBP/USD Options Market Anticipates 70 Pip Range on BoE Day

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The British currency's efforts to rise above the current barriers are most often unsuccessful. The pound, having made another attempt to grow, ran into obstacles in the form of weak macroeconomic data, rising inflation and the threat of recession.

At the beginning of this week, the British currency collapsed to its lowest level since March 2020. The reason is increased concerns about the UK's economic prospects. Against this background, market participants massively sold the pound. In the future, the pound sank even more, especially against the euro. The catalyst for this decline was the energy crisis that engulfed European countries and became the "fuel" for the expectation of a recession in the UK. According to analysts, the gloomy outlook for the British economy pushed the pound into a downward spiral.

Currency strategists at Goldman Sachs responded to this situation by providing another forecast. However, it did not please the markets, as it implied a deterioration in the medium and long-term economic prospects of the country. Recall that this year the pound has fallen by more than 13% against the dollar, and this is not the limit.

According to calculations by Goldman Sachs, in the fourth quarter of 2022, the UK will be gripped by a recession. At the same time, analysts lowered the forecast of GDP growth for 2023 to -0.6%. In the current situation, inflation in the UK will grow and exceed 20% at the beginning of next year, experts emphasize. The implementation of such a scenario is possible with a further increase in gas prices in Europe.

Goldman Sachs analysts note that core inflation in the UK will peak at 22.4% if the marginal price of gas soars by 80%. This indicator is several times higher than the previous forecast for inflation, which was 14.8%. Commerzbank economists agree with them, who believe that a prolonged increase in prices for blue fuel raises the risk of a recession. Against this background, it will be much larger and longer than previously expected. In such a situation, pressure is mounting on the Bank of England, so the central bank "needs to find a balance between fighting the recession and high inflation rates," Commerzbank emphasizes.

Amid galloping inflation, the British currency has a constant tendency to weaken. The tense economic situation is a kind of "black hole" for the pound, which deprives it of the opportunity to fully grow. According to the currency strategists of UOB Group, in the next few weeks the GBP/USD pair may collapse to 1.1630, although it is trying hard to stay afloat. The pound remains under pressure, risking testing the March 2020 low near 1.1410.

Currently, this threat has weakened a bit, as the pound has managed to slightly grow. The GBP/USD pair was trading at 1.1681 on the morning of Wednesday, August 31, trying to hold on to the positions won. The pound's efforts were relatively successful: the GBP returned to a downward trend much more often.

According to economists, in early autumn, the BoE, following its American and European counterparts, will raise interest rates (by 50 bps, to 2.25%). At the same time, experts do not rule out an additional increase in rates (by 25 bps) at the central bank's next meetings.

Against this background, the fragile balance of the pound raises concerns of market participants. A serious pressure on the GBP/USD pair is exerted by a reduction in the prospects for economic growth in the UK. The pound receives relative support when macroeconomic data from the United States deteriorates. However, now the markets are expecting positive statistics on the American economy, so the pound's chances to rise are small.

Company does not offer investment advice and the analysis performed does not guarantee results.

Source: Forex Analysis & Reviews: GBP/USD: The pound is not a flower, but is reaching for new heights. There is no way to make them grow: it withers halfway

GBP/USD Options Market Anticipates 70 Pip Range on BoE Day

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