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Stagflation and Article 16 risks


Fundamental weekly pound sterling forecast (GBP / USD): bearish

  • Inflation in the UK highlights next week’s key risks as growth prospects limit the length and magnitude of the Bank of England’s rate hike
  • The issue of the Northern Ireland Protocol comes to the fore again after the elections to the Northern Ireland Assembly and the latest EU proposal

Source: TradingView, prepared Richard Snow

Inflation data in the UK could exacerbate pound problems

May 5thBank of England (BoE) meeting increased by 25 basis points – with one-third of the committee preferring an increase of 50 basis points – still managed to be perceived as pigeons. Of course, this was due to the Bank’s great concern about declining growth in the coming months. These fears have already materialized in the March GDP data showing that compared to last month it decreased by 0.1%. According to the Bank’s latest forecast, GDP growth is expected to decline to zero in the second quarter of 2023 and become negative by the end of next year before recovering in 2024.

The current environment of trekking in weakness, which is called “walking the narrow path”, of course, is not ideal, but was justified by the Bank of England in the face of rising inflation. Next week we will have the UK CPI data on Wednesday that could see a rather unconventional response to the surprise rise in inflation. Generally, more than expected, the print is positive for the respective currency as it assumes a higher future interest rate at which markets immediately start price. However, in the UK, higher inflation exacerbates the existing contraction in the cost of living during a period of declining growth, which could lead to continued bearish growth. GBP / USD prices.

Weekly Pound Sterling (GBP) forecast: stagflation and Article 16 risks

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Market expectations agree with the current position of the Bank of England on a moderate increase in interest rates in the coming periods: the June meeting is expected to be 25 basis points, while in August there will be slightly less increase of 25 basis points.

Raise rates across the UK money markets

Weekly Pound Sterling (GBP) forecast: stagflation and Article 16 risks

Source: Refinitiv, prepared Richard Snow

The UK rejects the latest EU proposal on the NI protocol

Earlier this week, the EU unveiled a proposal it claimed to cut documents and inspect goods arriving in Northern Ireland from the UK. However, the UK government has commented that the proposal “will worsen current trade agreements”.

The risks of launching Article 16 re-emerged when Foreign Minister Liz Trass issued a statement Tuesday outlining her preference for “negotiated solutions”, but held a hard line, adding that she did not rule out “taking steps to stabilize the situation in the North”. Ireland. if no solution can be found. ”

Dissatisfaction with the NI protocol came to the fore this week after last week’s election to the Northern Ireland Assembly and could add to the already deteriorating fundamental prospects for both euro and pound.

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX


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