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British fiscal input will push the central bank to further raise interest rates

2022-06-06

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The GBP/USD fluctuated around 1.24995 this week, and the UK will invest more money to ease the impact of energy prices on income, which will push the Bank of England to raise interest rates further. Thanks to fiscal support, the Bank of England can help anchor inflation expectations without getting too nervous about economic conditions. The Bank of England is expected to raise interest rates in June, August, September and November, pushing rates to 2%.

The U.S. Commodity Futures Trading Commission CFTC foreign exchange business position report shows that as of 2022-05-31 in the week (hands) long positions in sterling decreased by 10016 lots to 193786 lots. The pound showed no material reaction to the government's announcement of an additional £15 billion in fiscal stimulus, leading markets to believe that the move at least prevented the pound from falling further.

British fiscal input will push the central bank to further raise interest rates

The GBP/EUR exchange rate actually fell on the news, but GBP Live observed that this was more to do with the euro's overall rebound. The pound rose slightly against the dollar, but the dollar was largely flat. In fact, in the main exchange rate of the pound, there is little special movement.

Money markets show investors expect the Bank of England to raise interest rates by around 100 basis points in 2022, which must be reached if the pound is to remain near current levels. If interest rates are cut as investors realize that the Bank of England will pause its rate hike cycle, the pound will be lower. Therefore, the boost provided by the BoE may actually just support current expectations, easing downside potential for GBP.

The GfK's consumer confidence index fell 2 points in May to -40, the lowest level since records began in 1974. This is crucial for the UK economy, which is driven by consumer-facing services. What's good for consumer confidence is good for the economy, which in turn is good for the pound.

Consumer confidence may have hit rock bottom in May if households feel that the measures announced by the government have improved their personal conditions. But economic surveys covering changes in sentiment and consumer behaviour are still at least a month away from the Chancellor's announcement, meaning a worsening trend in sentiment towards Britain and the pound may only emerge at the end of June.

The British "Guardian" published an opinion article saying that Russia is winning the economic war launched by the West. A series of sanctions by the West, not only did not crush the Russian economy, but instead pushed up energy prices and inflation in Western countries, making the ruble exchange rate stronger. He believes that although it is impossible for Western countries to compromise with Russia for the time being, it is "a matter of time".

On May 30, The Guardian also published an opinion article titled "EU Should Drop Sanctions Doing More Harm than Good". The article states, “NATO is very careful not to escalate the Ukraine crisis into a European-wide conflict. But sanctions can’t do much. Millions of innocent people in Europe will suffer as food and energy prices soar. Supply chains disrupted. Trade links Collapse. Victims are overwhelmingly poor.”

The daily K-line chart of GBP/USD shows:

The low-level bullish momentum rose strongly, touching the continuation of the upper track of the Bollinger Bands indicator and continued to move up to around 1.26706, with a short-term retracement near the middle track for finishing. The Bollinger Bands indicator showed an opening trend and then began to close. Pay attention to the node near 1.22143, pay attention to the turning point near 1.25760, the MACD indicator is at a low level in the bearish area and moves up to the 0 axis, and the RSI indicator is in a narrow range around the 50 equilibrium line, as shown in the figure:

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British fiscal input will push the central bank to further raise interest rates

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