UK economic slowdown weighs on sterling, job market may be stronger than Bank of England expects

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Sterling fell to a two-year low against the dollar this week, weighed down by a strong dollar, while a slowing U.K. economy weighed on the pound and the labor market may be stronger than the Bank of England expected, pushing prices higher. UK inflation is currently at 7% and may exceed 10% by the end of the year. The Bank of England raised interest rates to 1% last week, the fourth straight month of hikes, although it also warned of a sharp slowdown in the economy later this year.

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The US Commodity Futures Trading Commission CFTC foreign exchange non-commercial position report shows that as of the week (hand) of 2022-05-10, the long position of GBP/USD decreased by 4067 hands to 29469 hand positions. Sterling continued to slide against the greenback, suppressed by a strong dollar, with improving downward momentum suggesting GBP will fall below 1.22. Next support lies at 1.2140. Sterling then fell below 1.22 to hit 1.2165. While the short-term oversold could slow its further declines, the pound could still move lower.

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On Thursday, the Bank of England raised interest rates again by 25 basis points to 1%. The Bank of England has raised interest rates four times in a row since December; so far, UK rates have risen to their highest levels since 2009. The Bank of England also said it would consider aggressively selling bonds purchased under quantitative easing, a milestone since quantitative easing was introduced 10 years ago.

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The Bank of England will stop raising rates after raising rates by 25 basis points to 1.5% in June and August. Previously, it was expected to raise rates only in August. We still think the market is pricing in too aggressive this year (4-5 more 25bps rate hikes by the end of the year); therefore, while further monetary policy tightening in Q4 cannot be ruled out, we believe the BoE will Rate hikes were paused when rates hit 1.50% to assess new data.

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The Bank of England said that this year, Britain faces the risk of a double whammy of recession and inflation of more than 10%. Bank of England Governor Bailey also expressed pessimism about the prospects for an economic recovery, saying rising prices are starting to limit growth and could tip the economy into recession.

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Gross domestic product (GDP) fell 0.1% in March from February, meaning the economy grew just 0.8% in the first quarter, below economists' forecast of 1%, data from the Office for National Statistics showed on Thursday.

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While quarterly growth has brought output back to pre-pandemic levels, it will almost certainly be the year's high as the worst inflation since the 1980s is expected to cause the UK economy to lose steam quickly and possibly into recession. In March alone, output in both services and manufacturing shrank by 0.2%. Consumer-facing services fell 1.8%.

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According to one investment strategist, Britain's economic idiosyncrasies make it one of the most vulnerable countries in the world right now. The main problem in the UK is that its mortgage market is severely short-term. In the US and the rest of Europe, people prefer long-term mortgages, while many Britons opt for short-term loans of less than five years. Tracking mortgages is also popular, which fluctuates with the Bank of England's benchmark interest rate.

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The UK is a country of "imported inflation", so the impact of the BoE raising interest rates is not just a rebalancing of supply and demand, thereby slowly controlling the growth of consumer prices. 1.5 million fixed-rate mortgage deals are due to expire in 2022, with another 1.5 million due next year, according to trade association British Finance.

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Investment platform HargreavesLansdown has calculated in previously published figures that after the latest rate hike, a person could see their monthly payment rise by £61 if they re-mortgage after a two-year fixed-term deal closes. According to calculations by Hargreaves Lansdown, their monthly payments would increase by £134 if the benchmark rate hits 1.5%. According to a survey of 2,000 UK adults conducted on behalf of the platform in April, more than a third could not afford the extra costs.

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In the past, two-year fixed-term mortgages were popular because the loan term was shorter and the cost of the loan was often lower. However, the FT says that the popularity of five-year contracts has been rising, with 50% of fixed-term contracts in 2021 having this duration, while 45% of contracts are two-year contracts. According to Bloomberg, data from the Bank of England last week showed the effective interest rate (the rate actually paid) on new mortgages rose 14 basis points to 1.73% in March, the largest increase since at least 2016.

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The market bearish momentum continued to fluctuate downward in the middle and lower rails of the Bollinger Bands indicator channel, and the low level reached the node near 1.21555 and began to sort out. The short-term bearish momentum continued to decline. The Bollinger Bands indicator continued to oscillate downward and began to close gradually. Nearby, the low support is about 1.20122, and the turning point near 1.23361. The MACD indicator is at the low level of the bearish area and maintains a weak downward trend, and the RSI is at the lower side of the 50 equilibrium line, and the bearish area maintains a weak hovering, as shown in the figure;

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