30.01.2023 01:05 PM
The Bank of England has no choice

After the Bank of England meeting this week, the British pound is still optimistic about future growth since a sharp rise in salaries in the country is probably going to cause inflation to reach a new round and maintain its double-digit level.

Investors and experts anticipate that the UK central bank will increase its benchmark interest rate on Thursday to 4%. This will be the fastest increase in three decades and the greatest rate since 2008.

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This decision will be extremely painful for families who are already trying to cope with the greatest cost of living increase in history. In a protest that their pay is not keeping up with inflation, which increased to a 41-year high last year, more than 1 million employees in the public sector are set to abandon their positions this week.

Except for the time that followed the epidemic, politicians led by Governor Andrew Bailey are concerned that wages are rising at the quickest rate in history, raising the possibility of a spiral in which rising salaries lead to rising prices.

Officials are currently putting the finishing touches on an annual report on pay fluctuations and an evaluation of the economy's potential for productivity. The supply assessment is likely to indicate a more competitive labor market than anticipated, while the report is likely to focus on future wage increases by businesses in 2023. These elements will cause price increases, which will make it even more necessary to boost rates even when the economy is contracting.

At its meeting on Thursday, the Bank of England is anticipated to hike rates by 50 basis points as a result of a wealth of data demonstrating ongoing inflation. Although policymakers are expected to hold off on sending out overt signals that borrowing costs are about to reach their maximum, economists anticipate the action will put the central bank closer to the marginal rate in this cycle of hikes.

To avoid the development of a spiral in which wage growth + price growth, the Bank of England will need to further cool the economy by raising unemployment. This is true even though predictions called for a recession this year and a sharp decline in inflation compared to the level predicted in November.

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Many predicted a 4.8% pay gain in 2022, the highest percentage in the study's 15-year history. According to the most recent official data, average earnings, excluding incentives, rose 6.4% from a year earlier in the three months leading up to November. Since accounting began in 2001, this is the biggest rise.

The regulator has few options, particularly if the government of Rishi Sunak continues to offer concessions and raise wages for the populace to ease the worst recent cost-of-living problem.

Regarding the technical analysis of GBP/USD, the pound continues to be in demand. Purchasers must maintain their advantage above 1.2350. The only thing that will increase the likelihood of a further recovery to the area of 1.2440, after which it will be possible to discuss a more abrupt move of the pound up to the region of 1.2490 and 1.2550, is the failure of the resistance of 1.2400. After the bears seize control of 1.2350, it is possible to discuss the trading instrument's pressure returning. The GBP/USD will be pushed back to 1.2285 and 1.2170 as a result, hitting the bulls' positions.

Regarding the technical analysis of EUR/USD, there is still demand for the single currency, and there is a potential that monthly and annual highs will continue to be updated. To do this, the trading instrument must maintain a price above 1.0850, which will cause it to surge to the area of 1.0900. Above this point, you can easily reach 1.0930 and update 1.0970 in the near future. Only the breakdown of support at 1.0850 will put more pressure on the pair and drive EUR/USD to 1.0805, with the possibility of falling to a minimum of 1.0770 if the trading instrument declines.

Jakub Novak,
Analytical expert of InstaForex
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