BoE's Stance on Interest Rates Amidst Mixed Economic Signals

Britain's recent economic indicators are influencing the Bank of England's stance on interest rates. Megan Greene, a BoE policymaker, stated that wage growth and services price inflation data are too high for the bank to consider cutting interest rates at this time. Greene's comments echo her recent writings, where she expressed that interest rate cuts in Britain are not imminent due to persistent inflation pressures. She expects any rate cuts to be less aggressive compared to those of the U.S. Federal Reserve.

While financial markets anticipate a BoE rate cut in the third quarter of 2024, official data revealed that British consumer price inflation slightly decreased to 3.2% in March, while services price inflation dipped to 6.0%. The Bank of England predicts that inflation will reach its 2% target by the second quarter of this year before increasing again later in the year. Despite this, almost half of British firms intend to raise their prices in the next year, indicating ongoing inflationary pressures.

Additionally, wage growth in Britain remained high, with core wages rising by 6.0% annually. Although this growth rate is slightly weaker than in previous periods, it still presents a challenge for the BoE. The unemployment rate rose to 4.2%, signaling some moderation in the labor market's inflationary pressures.

Amidst these economic dynamics, Britain's housing market showed signs of recovery, with house prices experiencing a smaller decline in February. However, private rents increased significantly, posing additional challenges.

Despite these mixed signals, Britain's economy is expected to emerge from a shallow recession, with GDP growing by 0.1% in February, marking two consecutive months of growth. This indicates a stronger start to 2024, though challenges remain for Prime Minister Rishi Sunak to instill confidence in voters ahead of expected elections. While the Bank of England is expected to lower interest rates later in the year, investor expectations have been scaled back, with only one quarter-point cut fully priced in by the end of 2024, possibly in November.

On the other side of the Atlantic, the U.S. economy continues to show resilience, with Federal Reserve officials expressing reluctance to rush into interest rate cuts. Comments from New York Fed President John Williams emphasized the strength of the economy and the lack of urgency for rate cuts. While some policymakers anticipate rate cuts by the end of the year, others advocate for patience, suggesting that rate cuts may not be necessary until next year.

Recent U.S. economic data, including manufacturing expansion and stable inflation expectations, have bolstered the case for delaying rate cuts. However, challenges persist, such as stagnant jobless claims and a decline in existing home sales.

Market expectations for U.S. rate cuts have diminished, with traders pricing in fewer cuts compared to earlier projections. The most likely starting point for rate cuts is now seen as September, reflecting a shift from previous forecasts. Hence, it is anticipated that this could lead to a slight strengthening of the pound in the near term, with the currency likely to fluctuate within its current range, given the similar rates of return between the two economies.

Data for Technical Analysis (1H) CFD GBP/USD

Resistance : 1.2422, 1.2430, 1.2442

Support : 1.2398, 1.2390, 1.2378

1H Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.2383 - 1.2398 is touched, but the support at 1.2398   cannot be broken, the TP may be set around 1.2422 and the SL around 1.2376, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2422 - 1.2437, TP may be set around 1.2454 and SL around 1.2391, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2422 - 1.2437 is touched, but the resistance 1.2422 cannot be broken, the TP may be set around 1.2398 and the SL around 1.2444, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2383 - 1.2398, TP may be set around 1.2358 and SL around 1.2429, or up to the risk appetite.       

Pivot Points Apr 19, 2024 02:47AM GMT