The British currency experienced a significant decline at the beginning of the week but later partially recouped its losses. After the drop, GBP gradually gained momentum and surged towards new highs. Its efforts were partially successful, but GBP remains determined and has tried to hit new highs.
The recent decline of the pound sterling occurred due to negative macroeconomic statistics from the United Kingdom. According to the data, the UK manufacturing Purchasing Managers' Index (PMI) decreased to 46.9 points in May. This came as an unpleasant surprise to the markets, which had expected the index to reach 48 points. As for the preliminary UK services PMI, it fell to 55.1 points in May. Experts forecasted the index to reach 55.5 points.
Against this backdrop, the British currency depreciated by 0.3%, reaching the key level of 1.2400. The pound sterling dipped to 1.2385-1.2387 at certain moments. Later, experts noted that GBP has risen slightly. In the morning of Wednesday, May 24, GBP/USD was trading at 1.2440, trying to regain lost ground and consolidate at higher levels.
Earlier, the International Monetary Fund (IMF) provided an updated forecast for the British economy, expecting the UK economic growth to slow down in 2023. According to the agency's estimates, the United Kingdom's economy will avoid a recession this year and maintain a positive momentum.
Persistently high inflation, which has been rising for the past nine months, remains a weak point of the UK economy. It can be attributed to the labor shortage in the country and historically high food prices. However, there has been some cooling in the labor market lately, driven by the Bank of England's interest rate hikes. In this situation, GBP/USD may advance slightly if the UK Producer Price Index (PPI) increases.
Market participants are focused on the Consumer Price Index (CPI) for April. According to the Office for National Statistics (ONS) reports, UK CPI increased by 8.7% YoY in April, down from 10.1% in March. Analysts expected the index to rise by 8.2%.
The core CPI, which excludes food and energy prices, rose by 6.8% in April from 6.2% in March. Regulator's estimates suggest it could lead to further rate hikes.
Initially, GBP/USD increased by 0.32% following the release of the UK CPI data, reaching a daily high of 1.2466. The pound later declined slightly but tried to rise to new highs.
Against this backdrop, IMF economists expect energy prices to fall by the end of 2023. According to analysts' estimates, this will reduce inflation in the UK to 5%. The IMF expects inflation in the country to drop below the target level of 2% by mid-2025.
The IMF also forecasts UK GDP growth to slowdown to 0.4% in 2022. Economic growth is expected to 1% by 2024, and to 2% by 2025. Analysts are confident that the country's monetary policy should remain tight to effectively control inflation expectations.
The IMF forecast did little to help the pound. Initially, the British currency ignored the upwardly revised forecast and declined by 0.5% to a low of 1.2373. Ambiguous macroeconomic data, which showed increased activity in the UK services sector and a prolonged decline in the manufacturing sector, added fuel to the fire. However, the pound sterling later recovered, partially regaining its losses, and moved higher. Analysts believe that in the short term, the pound sterling is capable of making a comeback, but it needs to consolidate its gained positions.
GBP is predicted to decline in the medium and long term. Unjustifiably high expectations regarding the Bank of England's key interest rate hikes further exacerbate the situation. Currency strategists at Commerzbank are confident that in such a situation, the British currency will end up under downward pressure.
Currently, most market participants expect the BOE to increase the rate by 25 basis points at the regulator's next meeting in June. This will support the pound in the short term, but further upward momentum of GBP remains uncertain.
