06.02.2023 11:56 PM
The currency market is in the mood to sell the pound

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The British pound is feeling very uncertain against the euro and the dollar, and especially after the release of unexpectedly strong data from the U.S.

Assets, which are very risk sensitive, and the pound sterling belongs to them, began to fall after the release of the US labor market data. The U.S. unemployment rate dropped to 3.4% from 3.5%, although analysts predicted the growth of unemployment to 3.6%.

The figures for January showed that the U.S. economy is in a very stable condition. And this clearly surprises experts, who did not expect such a good result, especially amid constant interest rate hikes by the Federal Reserve, which usually hinder the full-fledged development of the economy.

Most likely, after the strong report on wages, the FOMC representatives will keep the rate at a higher level in the country and further. It is now all too likely that the FOMC will raise rates again by 25 basis points at the March meeting.

The dollar, not surprisingly, reacted to all this news with a strong rise.

But the pound is a "high beta" currency, which tends to lag behind the dollar and the euro at times when investor sentiment worsens and markets mostly fall.

GBP/USD was down 1.30% on February 6 and hit 1.2014.

The British pound led losses on a day of intense central bank action. Some analysts acknowledge that the British currency does not have the brightest prospects in the near future.

The Bank of England raised interest rates on Thursday, but made it clear it does not intend to raise them any more. The same can be said about the European Central Bank and the Fed. But the pound suffered losses from actions and statements of its own central bank.

On Monday, we found out that not all representatives of the BoE are in favor of stopping rate hikes. For example, Monetary Policy Committee member Catherine Mann criticized the idea of a pause in the cycle of rate hikes, which was advocated last week by her colleagues at the central bank. She said it was not a good idea to put the brakes on policy tightening in the United Kingdom because it could have unintended consequences.

Mann has always been a loyal advocate of tough policy at the BoE, and she now firmly believes that the risk of insufficient policy tightening far outweighs the risk of excessive rate hikes.

Consulting firm Oxford Economics released its research on Monday that found Britain is the country most at risk of too much monetary policy tightening.

Overall, one cannot but agree that excessive policy tightening is bringing the British economy closer to an undesirable severe downturn, and the full effect of the BoE's rate hikes has yet to fully materialize.

Andreeva Natalya,
Analytical expert of InstaForex
© 2007-2023
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