The British economy continues to shrink, and the pound may usher in a new round of turmoil

GBP/USD is in a consolidation retracement and has been weighed down by poor economic and public finance health, with the UK economy unexpectedly contracting 0.1% q-o-q in the second quarter of 2022 as the country's cost of living crisis hits. Britain's next prime minister proposes to revise the powers of the central bank, and the pound may usher in a new round of storms.

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The U.S. Commodity Futures Trading Commission CFTC foreign exchange non-commercial position report shows that as of 2022-08-09 the week (hand) GBP long positions increased by 12,914 hands to 42,219 hands. Given that growth expectations are already low and the market remains bearish on GBP, the risk of a further sharp decline in GBP has receded.

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The outlook for the UK economy looks dire, with households about to be hit by a sharp rise in energy prices. Consumers are already battling a nasty cost-of-living crisis, and as they tighten their wallets, the specter of a recession will become more apparent. It is weak economic growth expectations that will continue to put the pound at a disadvantage against the G10 currencies.

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Bank of England chief economist Huw Pill said the central bank needs to double its inflation target. A "short-term rate hike" could also mean an "economic slowdown." The Bank of England has raised interest rates six times since December 2021, and the effects of the measures will not be felt until the end of 2023.

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While the FX market still seems to be pricing in a possible soft landing for the U.S. economy, the U.K. could face the risk of a hard landing. Commerzbank economists expect the pound to struggle to rise. The Bank of England has said it expects a more prolonged recession in the UK from the end of the year. Rising energy costs are a key reason why the Bank of England has sharply raised its inflation forecast. Of course, the Bank of England also wants to keep inflation under control. However, everything depends on how Europe's energy crisis develops. But the BoE's (rate hike) course is not set in stone, so downside risks to the pound remain high.

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Risk currencies such as the pound and the Australian dollar followed global stock markets higher as investors lowered expectations for a rate hike by the Federal Reserve. Sterling has retreated from recent highs against the euro last week after the Bank of England's August policy update, but global investor sentiment has improved The downside risk has been greatly reduced in the environment of .​​

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The annual rate of the US CPI in July was 8.50%, 0.2 percentage points lower than the expected value, far from the 9.1% high in more than 40 years set last month; the core annual rate was the same as the previous value (5.9%), also lower than the expected value by 0.2 percentage points percentage point. The annual rate of producer price index (PPI) fell significantly in July, and the monthly rate was unexpectedly contracted. After the data was released, the dollar weakened sharply, and investors considered that inflation may have peaked and cut expectations for a third consecutive 75 basis point rate hike at the Fed's September meeting. Traders in interest rate futures now see a roughly 40 percent chance of a 75 basis point rate hike by the Fed in September, down significantly from nearly 70 percent before the data.

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Chicago Fed President Evans said on Wednesday that inflation remains at an unacceptably high level, making it challenging to fight it, and he doesn't expect the Fed to end raising interest rates as the market expects. “The U.S. economy will almost certainly be a little more fragile, but it will take some headwinds to trigger a recession. I don’t see a sharp decline in the short term. I expect growth of 1.5%-2% next year.”

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The momentum of the low bulls continued to fluctuate and rose after finishing. It may maintain a wide range of fluctuations in the short term. The overall upward trend of the market has begun to show signs of weakening. The top suppresses focus around 1.23838, and the low support focuses around 1.19634. The MACD indicator is hovering above the 0 axis, and the RSI indicator is 50 balanced line and side finishing, as shown in the figure:

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