Forex Analysis & Reviews: 18.12.2024 - The Pound Has a Chance for a...

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18.12.2024 12:26 AM

The Pound Has a Chance for a Corrective Upside Move

The latest adjustments to forecasts for the Bank of England's decision on Thursday suggest that the rate will remain unchanged at 4.75%. As no updated GDP and inflation forecasts will be presented at this meeting, the market's reaction will likely be quite muted.

There are no substantial grounds for surprises that could contradict the forecasts. Headline inflation in October was slightly above expectations, but more importantly, price growth in the services sector met predictions. Economic growth was somewhat weaker than expected, but it is still unclear if it is weak enough to exert pressure on the BoE's decision.

On Friday, a significant batch of economic data was released, with October's industrial production report standing out as it performed much worse than expected. Additionally, NIESR's growth rate assessment for GDP was revised downward to zero. Monday's Manufacturing PMI data further compounded this disappointing result, which unexpectedly fell from 48 to 47.3, sinking deeper into contraction territory. For now, weakness in manufacturing is being offset by growth in the services sector, which increased from 50.8 to 51.4. This compensation is likely sufficient for the BoE to refrain from cutting rates due to concerns about a rapid economic slowdown.

The labor market report published on Tuesday has undoubtedly increased the likelihood that the BoE will keep rates unchanged. Average wage growth, including bonuses, for the three months ending in October unexpectedly rose from 4.4% to 5.2%. This strong growth supports persistent inflation and is driven by internal factors that cannot be attributed to seasonality or base effects. This will continue to fuel price increases.

We believe the BoE will deliver the result anticipated by the market – the rate will not be reduced. Since the meeting will occur a day after the Federal Reserve's meeting, where the rate is likely to be cut, the pound could gain a short-term advantage over the dollar and recover some of its losses. However, this advantage will likely fade quickly. The market anticipates rate cuts at every BoE meeting in the first half of 2025 as the base effect for inflation dissipates. By year-end, the rate is expected to fall to 3.25%, lower than the Fed's rate. Given the overall weakness in UK economic growth, this will be a key argument for continuing the downward trend in GBP/USD.

The British pound is one of the few currencies holding firm against large-scale USD purchases. Over the reporting week, the net long position increased by $634 million to $2.165 billion. The bullish bias indicates at least short-term resilience before the BoE meeting. However, compared to the peak in July, losses are still significant, and overall positioning does not appear to be a solid foundation for strong growth. The estimated price attempts to turn upwards but remains significantly below the long-term average.

The GBP/USD pair can develop another corrective wave toward the 1.2830/40 resistance zone, especially if the BoE's meeting outcome is more hawkish than the market currently expects. However, in the longer term, the pound's prospects remain bleak. The current growth is based on temporarily rising inflation, which stems from base effects and will lose relevance in a few months. The more likely scenario is a return to the downward trend following the market's reaction to the BoE decision, with the long-term target at 1.23.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.