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The American dollar managed to hold its ground on the Forex throne; however, in the Eurozone, there is another king. Bank of America dubbed the British pound the "dollar of Europe" for its remarkable ability to remain among the leaders among the major currencies even in conditions of a weak economy. Indeed, the UK GDP decreased by 0.3% in the fourth quarter, following a 0.1% decline, which signals a technical recession. And this is a bad news for GBP/USD.
It may seem that Rishi Sunak failed to fulfill his promises of creating a growing economy. This casts a shadow not only on the Prime Minister but also on his entire team. Thus, Chancellor Jeremy Hunt's hints at tax cuts ahead of parliamentary elections seem more like bravado and an intention to support the ruling party. Simultaneously, the reduced likelihood of new fiscal stimulus puts pressure on GBP/USD, as this bullish factor has already been factored into pound quotes.
Dynamics of the British economy
Nevertheless, Forex traders deal not with statics but dynamics. Not with the past but with the future. The impressive 3.4% MoM growth in British retail sales, the best since April 2021, indicates that the economy is starting to recover. Thanks to the December surge, retail trade volumes have returned to the levels of early November 2023. The recession is unlikely to continue in early 2024, setting a bullish tone for GBP/USD.
Moreover, the stability of inflation allows Bank of England officials not to rush with reducing the repo rate. Thus, Bank of England Chief Economist Huw Pill believes that the start of monetary expansion will not happen sooner than a few months, and his MPC colleague Megan Greene requires more evidence of disinflation to vote for a loosening of monetary policy.
The urgent market expects a 70 basis points reduction in the repo rate, which is less than the 90 bps for the federal funds rate. Derivatives predict the start of Bank of England's monetary expansion in August, while the Fed's in June. The sluggishness of Andrew Bailey and his colleagues plays into the hands of GBP/USD.
Dynamics of market expectations for the repo rate
The dynamics of market expectations regarding the repo rate are of great importance for the analyzed pair. The fact that the markets have come to a consensus with the Fed is crucial. Now, they agree with the FOMC's December forecasts of three to four acts of monetary policy easing in 2024, starting in the middle of the year. At the end of 2023, there were talks of six, beginning in March. The shift in market perception played into the hands of the American dollar. Now it has lost its main trump card.
In the week leading up to February 23, GBP/USD traders will be focused on business activity data for Britain and the U.S. as well as the minutes of the January Fed meeting.
Technically, the formation of the reversal pattern 1-2-3 suggests exhaustion of the corrective movement towards the rising trend of the pound against the American dollar. A consolidation of GBP/USD above 1.2595 with subsequent updating of the local high at 1.2535 could be the basis for buying the pair.
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