British Pound Forecast – Has the BoE Finished Hiking Rates?

The British Pound is back at multi-week lows against the Euro and at multi-month lows against the US dollar as confidence in Sterling continues to dissipate. The Bank of England recently left the UK Bank Rate unchanged at 5.25%, after 14 consecutive rate hikes, and hinted that, all things being equal, that rate rises in the UK may be a thing of the past. While the UK is expected to avoid a recession, and inflation is expected to fall significantly in the near term, was the decision to leave the Bank Rate untouched the right choice? The overarching question for Sterling in Q4 is – Will official data match Governor Bailey’s and the slim majority of MPC members’ confidence that inflation and growth are going in the right direction?

Learn How to Trade GBP/USD

The latest BoE MPC minutes showed a slim majority of MPC members voted to keep rates on hold. The 5-4 decision leaves more questions than answers as to where these members see inflation and growth in the coming months. If inflation is falling, as per BoE comments, does this mean that UK growth is weaker than currently forecast and that the UK central bank is taking pre-emptive action to prevent the economy from falling into a recession? And what happens if inflation picks up again, as it did at the start of Q1, will the BoE raise interest rates again?

Annual Core Inflation

UK growth remains tepid at best with GDP expected to only rise marginally in Q3, while growth in H2 is expected to be weaker than originally forecast. It will not take too much of a downturn for growth to flat line in Q3 and while the UK may avoid an official recession, the UK economy, and the Bank of England, may well face the tricky problem of stagflation in the quarters ahead. The UK economy did receive some good news recently when the Office for National Statistics (ONS) upgraded the UK post-covid performance. According to the ONS,upward revisions to annual volume GDP growth in 2020 and 2021 mean that GDP is now estimated to be 0.6% above pre-coronavirus (COVID-19) pandemic levels in Quarter 4 (Oct to Dec) 2021; previously this was estimated as 1.2% below. Good news for the UK economy but its rear view mirror news and doesn’t help the Government or BoE too much going forward.

You Can Download the Complete Q4 British Pound Guide, Including Technical Analysis of GBP/USD, EUR/GBP, and GBP/JPY Below

With the UK economy struggling with high inflation and low growth, Sterling as a currency is likely to continue Q3’s underperformance. Volatility is likely to return as markets become increasingly influenced by data releases and official commentary, leaving the British Pound vulnerable to larger and increasingly more erratic moves.