UK interest rate hike expectations cool, pound and US continue to fall

Sterling fell to a two-year low against the dollar this week, weighed down by a strong dollar, while expectations of a U.K. rate hike cooled. The main reason for the fall of the pound this round is mainly affected by the war situation in Russia and Ukraine. It is reported that the United States intends to allow Ukraine to join NATO, which once again exacerbated the deterioration of the situation in Russia and Ukraine. There is also a reduction in expectations for a rate hike by the Bank of England.

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The U.S. Commodity Futures Trading Commission CFTC foreign exchange non-commercial position report shows that as of 2022-04-26 in the week (hands), the long position of GBP/USD increased by 3,625 lots to 40,436 lots. Sterling has been low since the Russian-Ukrainian conflict escalated. This week, the pound saw another wave of sharp losses, and the pound against the dollar has reached a new low since July 2020 and is close to the lowest point in nearly two years.

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Institutional Outlook: The Bank of England will cut its economic growth forecast next week. The Bloomberg economist team believes that the Bank of England will cut its growth forecast for this year next Thursday. It may think that the economy will avoid recession, but the second and fourth quarters A contraction is likely; CPI inflation forecasts for 2022 will be revised up sharply to reflect recent data and the rise in energy prices driven by the Russian-Ukrainian conflict since February. The Bank of England is expected to see inflation undershooting its target by a greater degree over the next three years, possibly around 1%. Given the uncertain outlook, the wording of the possibility of future rate hikes may be similar to that in March, that "further tightening of policy in the coming months may be appropriate".

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The Bank of England may raise interest rates for the fourth time in a row in May, pushing rates to the highest level since 2009, but the central bank is expected to be more cautious going forward, according to a team of Bloomberg economists. The Bank of England is expected to raise its benchmark interest rate from 0.75% to 1% in a 6-2-1 vote, with Mann and Sanders likely to vote for a 50 basis point hike, and Deputy Governor Cunliffe likely to support maintaining Interest rates remain unchanged. If the benchmark rate is raised to 1%, it will reach the level at which the Bank of England will consider actively selling British government bonds, and the meeting is expected to discuss more details of the process. Our assumption is that sales of government bonds start in the second half of the year (probably in the fourth quarter), with a monthly quota of 5 billion pounds.

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Market analysis: British retail stocks and sterling fell due to fears of a recession, as British consumer confidence fell to its lowest level since 2008, and nearly 2,000 companies fell into serious financial difficulties, the British non-essential retail category index this year The negative sentiment caused investors to flee the pound. In April, the pound fell by more than 4% to the level of 1.25, recording its worst monthly performance since Brexit in 2016. Analysts expect the pound to fall to the 1.20 level against the dollar, and options traders have increased bets for further losses in the coming months. Recession risks have also led money markets to pare bets not only on the magnitude of the Bank of England's rate hike cycle, but also on a possible rate cut as early as 2024.

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According to the latest report, the money market has been lowering its expectations for the scale of the Bank of England's interest rate hike. The market currently generally expects the Bank of England to raise interest rates by about 140 basis points by the end of the year, compared with 160 basis points on Friday. Separately, the latest data showed that the amount of UK government borrowing in the 2021/22 financial year was nearly 20% higher than expected.

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This poses a "challenge" for the Bank of England, as Rabobank's Jane Foley said, adding that buying interest in sterling could fade quickly if recession fears intensify. If the economic outlook for the pound looks bleak, the political outlook will only make the situation even bleaker, as pressure mounts for British Prime Minister Jensen to resign.

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Societe Generale’s Kit Juckes believes any interest rate appeal of the pound could soon fade away. He predicted that the Bank of England will not raise rates by 150 basis points by the end of the year, as money markets are still predicting because the economy will not be able to bear it. Nearly a quarter of Britons said it was more difficult to pay household bills, with more than 40% saying they would not be able to store money in the next 12 months. This comes before regulated energy price increases take effect.

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The momentum of the bears fell sharply, and the lower track of the Bollinger Bands indicator continued to move down to the node near 1.24128 and then reversed. The market bears are in a good downward trend. The Bollinger Bands indicator is in an open trend. The top suppresses and pays attention to the vicinity of 1.28788, and the low support pays attention to the node near 1.24014. At the turning point near 1.26930, the MACD indicator is in the bearish area and continues to oscillate downwards. The RSI indicator remains in the bearish area and continues to oscillate down to the oversold zone 15 equilibrium line hovering on the side of the line, as shown in the figure:

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