20.03.2023 11:26 AM
Banking crisis makes sterling look better than euro and U.S. dollar

The banking crisis has cast doubt on whether the Fed and other regulators will continue to raise rates to fight inflation or halt the monetary tightening cycle. The Bank of England is no exception. Despite higher inflation rates and average wages in the UK compared to the U.S. and the eurozone, the markets estimate the likelihood of a 25 bps increase in the repo rate to 4.25% or keeping it unchanged at the BoE meeting on March 23 as fifty-fifty.

Even before the U.S. bank failures, MPC members were divided on this issue. Bank of England Governor Andrew Bailey warned the markets against assuming that the BoE needs to do more at this stage. His colleague on the Committee, Catherine Mann, argued that monetary restriction had not yielded results and it was necessary to continue in the same spirit. The sooner, the better. The banking crisis may affect the worldview of central banks, which have to choose between suppressing high inflation and financial stability. That is why the March decision of the Bank of England is on a knife edge.

Estimated dynamics of the repo rate

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The OECD is urging the central bank not to stop and take another step by increasing the cost of borrowing to 4.25%. They said it is not 2008, and the banking system is in a much stronger position now. Is it worth it to stop early? The ECB has proven that it isn't. Christine Lagarde and her colleagues set an example for other central banks by raising the deposit rate by 50 bps, and the Frenchwoman said at a press conference that European banks are as strong as granite.

If the ECB, with its proximity and ties to the troubled Credit Suisse, is not going to slow down the pace of monetary tightening, why should the BoE? The pound was faring better than the U.S. dollar and the euro in the week to March 17, proving that investors are less panicked about the state of the British banking system than its American and European counterparts.

Dynamics of Central Bank Rates

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The slowdown in annual and two-year inflation expectations from 4.8% to 3.7% and from 3.4% to 3%, respectively, speaks in favor of keeping the repo rate at 4%. The former is the lowest since November 2021, while the latter is more than a year low.

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The final verdict of the Bank of England will likely be influenced by statistics on February inflation, which will be released on March 21. Bloomberg experts expect a slowdown in consumer prices from 10.1% to 9.8% year-on-year. The growth rate of core inflation is likely to remain at 5.8%. Their decline will be a pleasant surprise for the BoE, increase the chances of completing the cycle of monetary policy tightening, and put pressure on the pound.

Technically, on the daily chart of GBPUSD, the rebound from the fair value and dynamic support in the form of moving averages allowed to increase the previously formed longs. The targets at 1.235 and 1.26 have not been canceled. The recommendation remains the same—buy.

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