The market expects the British economy to decline, the pound and the United States remain vulnerable

GBP/USD briefly recovered, institutions believe that the currency pair is still fragile and is expected to fall below 1.2. Hot, dry weather in the UK in July boosted nominal sales but also had a potential negative impact. The European Central Bank is expected to continue raising interest rates, while the pace of rate hikes by the US and UK central banks is expected to slow.

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The agency expects the UK economy to enter a recession in the fourth quarter of this year and not emerge from it until 2024. A five-quarter recession, starting in the fourth quarter, sounds pretty bad for the pound. However, whether the British economy will fall into recession still needs to be further observed from all aspects. The current record-high inflation has forced the Bank of England to continue raising interest rates, but the current rate hike does not seem to have much stimulating effect on the currency, because raising interest rates too hard means that the economy may be damaged. 

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Sterling was widely sold after the Bank of England raised interest rates for the sixth time last week to 1.75%, but warned that the UK economy was about to enter a recession that was expected to be more severe and prolonged than the recessions of the early 1990s and early 1980s. Market analyst James Skinner said it remains to be seen what the pound will do in the coming days, although there are few major events to affect the pound ahead of Friday's release of June and second-quarter GDP figures, both of which are expected to show a contraction in the UK economy .

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The market is pricing in a cumulative rate hike of 100 basis points for the remaining three meetings of the Bank of England this year. The Bank of England may be able to meet market expectations for a rate hike, but under-delivery is more likely than over-delivery, putting pressure on the pound. The inverted yield curve of British government bonds shows that the market is worried that the British economy may be in recession, and that the tightening policy of the Bank of England may only be temporary, so it is more difficult for the pound to continue to rise after the market price in raising interest rates. Sterling still faces cyclical and structural challenges, with downside risks to GBP/USD in the second half of 2022 and next year.

Analysts at Mizuho Bank pointed out that the British Conservative Party leadership election, which will end in September, is a cause for concern. A win for British Foreign Secretary Truss would put downward pressure on the pound. Recent opinion polls put the British Foreign Secretary Truss ahead in the election. Analysts, however, still have questions about her ability to manage a country's economy. For example, she called for tax cuts and a halt to tax increases, but did not say how those costs would be covered. She also said the UK could learn from Japan in dealing with inflation. Analysts cautioned that market participants need to pay attention to future polls, but if Truss becomes the next prime minister, the pound is likely to weaken; conversely, if Sunak becomes the next prime minister, the pound will strengthen.

Bank of England Deputy Governor Ramsden: Inflation expectations remain stable. It is more likely that we will have to raise interest rates further, but at some point a rapid rate cut will not be ruled out. Treasury sales and rate cuts will go hand in hand. Borrowing costs are more likely to rise again.

Lee Hardman, FX analyst at MUFG, said: "By monitoring the relationship between GBP/USD fundamentals and the spot exchange rate, the short-term fair value model calculates that the spot exchange rate is undervalued by -0.37%, suggesting that immediate Futures are being more closely influenced by fundamentals. Fed officials in recent days have encouraged market participants to expect an eventual rate hike.”