28.02.202215:13 Forex Analysis & Reviews: GBPUSD: War in Ukraine may slow pace of BoE's tightening of monetary policy

War is a terrible thing. The closer you are to it, the worse it is for you. Britain, of course, is not at the epicenter of events, but Europe's close connection with Russia, more precisely, with the oil and gas supplied by this country, makes the pound flee the battlefield. Against the backdrop of hostilities in Ukraine, GBPUSD quotes collapsed to 2-month lows, despite expectations that the Bank of England's monetary restriction cycle would continue.

Large-scale sanctions against Russia, including cutting off some banks from SWIFT, have caused quite a stir in the financial markets. Investors are seriously worried about disruptions in the supply chains of energy products. For Britain, this means the approach of stagflation - the highest consumer prices and sluggish economic growth. The April energy price ceiling is set to rise by 54% to £1,971, which could push 5 million households into fuel poverty. Investec Bank predicts that due to the conflict in Eastern Europe, it will rise by another 50%, to more than £3,000. BoE Chief Economist Huw Pill expressed concern about rising gas prices, leaving consumers to choose between food and heating.

Dynamics of GBPUSD and gas prices

Along with rising fuel costs, the UK economy will certainly be slowed down by the forthcoming tax increase in the spring. At the same time, the IMF believes that London should act more aggressively with the tightening of fiscal discipline, as the planned measures will not be able to slow down inflation, and wages will not be cut as much as the Bank of England predicts.

The economic slowdown is forcing the BoE to hold back on tightening monetary policy. Pill believes that a decision to raise the repo rate should be made in a balanced way, and MPC member Silvana Tenreyro is sure that it is not worth going too far with monetary restrictions. In her opinion, if the Bank of England decided to return inflation to the 2% target as soon as possible, unemployment would rise from 4.1% to 10%, and real wages would fall by 10%, which is five times higher than the regulator's forecast.

The dovish rhetoric of the MPC members reduces the likelihood of an increase in the repo rate by 50 basis points at once in March and allows investors to get rid of the pound. At Forex, the opinion is being strengthened that the Fed will act more aggressively than the Bank of England due to the smaller losses of the U.S. economy from the war in Ukraine, unlike its British counterpart. Indeed, the derivatives market is forecasting that the federal funds rate will rise to 1.5% in 2022, and Wall Street Journal experts warn that even such Fed aggression may be overdue.

In my opinion, in the short term, GBPUSD quotes are able to grow following the U.S. stock indices on expectations of negotiations between Moscow and Kyiv. However, one should not deceive oneself, the positions of the parties are so divergent that the dialogue is unlikely to be constructive. This gives grounds to sell the sterling against the U.S. dollar on the rise.

Technically, the inability of the GBPUSD bulls to close the gap is a sign of their weakness and a reason for selling the pair in the direction of 1.3255 and 1.312.

GBPUSD, Daily chart