British Pound Talking Points
The update to the UK Gross Domestic Product (GDP) report may produce headwinds for the British Poundas the Bank of England (BoE) expects economic activity in the third quarter of 2021 to expand “at a slower pace than projected in the August Report.”
Fundamental Forecast for British Pound: Bearish
GBP/USD is on the verge of testing the yearly low (1.3509) as the BoE keeps the benchmark interest rate at the record low of 0.10% in November, and it seems as though the central bank will retain the current course for monetary policy as “growth is somewhat restrained by disruption in supply chains.”
As a result, fresh data prints coming out of the UK may keep GBP/USD under pressure as “GDP was expected to grow by around 1.5% in 2021 Q3 and by 1% in Q4 in the November Report projections,” and it seems as though the Monetary Policy Committee (MPC) will stick to the sidelines at its next interest rate decision on December 16 as “GDP was expected to remain below its pre-Covid level until 2022 Q1.”
However, a better-than-expected GDP print may fuel a growing dissent within the BoE as “the Committee had judged that some modest tightening of monetary policy over the forecast period was likely to be necessary to meet the 2% inflation target sustainably in the medium term.” In turn, it remains to be seen if Governor Andrew Bailey and Co. will adjust the forward guidance at its last meeting for 2021 as one member “judged that it would be appropriate to remove some of the monetary stimulus to asset prices by terminating the existing asset purchase programme at this meeting, ahead of any subsequent increase in Bank Rate.”
Until then, the reaction to the BoE’s November rate decision casts a bearish outlook for GBP/USD as the exchange rate approaches the yearly low (1.3509), and the British Pound may depreciate against its US counterpart throughout the remainder of the year as the Federal Reserve starts to scale back monetary support.
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
