Whatever problems the government and the Bank of England face, they all pale in comparison with the market's belief in slowing down the process of tightening the Fed's monetary policy. The decline in the growth rate of US consumer prices in October from 8.2% to 7.7% and core inflation from 6.6% to 6.3% was the catalyst for large-scale sales of the US dollar. And even the pound, vulnerable due to the weakness of the British economy, managed to soar above $1.18.—last seen at these levels in late August.

The sterling rally was much less violent than the euro or the yen due to the presence of significant uncertainty in monetary and fiscal policies of the UK. On November 17, the government is due to present a new plan showing how it intends to close the £50 billion budget gap. Tax hikes will be likely, which, in a recession already in place, looks like cutting the branch you're sitting on.

Indeed, the UK GDP sank by 0.2% QoQ in the third quarter. The final figure was less than Bloomberg experts predicted, but Britain remains the only G7 economy that has not yet recovered from the pandemic.

Dynamics of the G7 economies

In such circumstances, the appearance of "dovish" speeches from representatives of the Bank of England does not look surprising. Silvana Tenreyro believes that repo rate was in restrictive territory even before the 75 bps increase in November to 3%. It's just that monetary restrictions affect the economy with a time lag, and the current level of borrowing costs is enough to bring inflation back to the 2% target.

Personally, I have serious doubts about her words, considering the forecasts of Bloomberg experts about the acceleration of consumer prices in the UK in October from 10.1% to 10.4%. According to Investec, this time, the main driver of the CPI acceleration will be energy: in the second month of autumn, electricity bills for British households rose by 27%. At the same time, economists believe that core inflation has slowed from 6.5% to 6.2% amid weakening domestic demand.

Thus, it is very difficult for both the government and the Bank of England to make responsible decisions against the backdrop of a recession, the need to put public finances in order and high inflation. However, the GBPUSD is at risk of further gains due to massive sell-offs in the US dollar.

Unlike in Britain, inflation in the United States continues to slow down and, most likely, has already passed its peak. This allows the futures market to assume that the federal funds rate will never reach the 5% mark that everyone expected. If so, then the top of the USD index is left behind.

Technically, the Three Indians pattern has formed on the GBPUSD daily chart. However, its implementation requires a drop in quotes below 1.155. Until that happens, the sentiment remains bullish. We use the pair's pullbacks followed by a rebound from the supports at 1.175 and 1.165 for purchases.