BoE Faces Scrutiny on Bond Sales, Inflation Forecasted at 2.2% in 2024

Britain's unemployment rate for late last year has been revised lower, standing at 3.9% for the three months to November, compared to the previously reported 4.2%. This adjustment, based on re-weighted survey results reflecting the latest population estimates, may influence the Bank of England's (BoE) decision on interest rates. The BoE closely monitors the labor market to assess whether inflationary pressures have subsided enough to warrant a cut from the current benchmark rate of 5.25%. However, economists believe the new data will likely urge BoE officials to exercise caution and delay rate cuts.

Meanwhile, services businesses in the UK started 2024 on a positive note, with strong new orders and the fastest hiring in six months. This contrasts with weak manufacturing numbers attributed to shipping disruptions in the Red Sea. The BoE forecasts a gradual economic recovery in 2024, but BoE Chief Economist Huw Pill remains cautious about rate cuts, citing concerns about rising wages and the cost of labor-intensive services.

The UK's finance ministry and the BoE face scrutiny regarding the sale of government bonds from the central bank's balance sheet. Lawmakers recommend considering taxpayers' interests in decisions around the sale of bonds, especially as the BoE shifts from quantitative easing (QE) to quantitative tightening (QT). The BoE's bond holdings, once profitable, are now turning into a significant loss for public finances, impacting government fiscal space.

In construction, optimism among UK firms has reached a two-year high, fueled by expectations of interest rate cuts. Higher shipping costs have led to increased prices for raw materials, with some disruptions in the Red Sea impacting deliveries. The construction sector's outlook aligns with data from the Royal Institution of Chartered Surveyors, indicating a more positive trend.

The National Institute of Economic and Social Research (NIESR) predicts a slow recovery in British living standards, with the economy entering a shallow recession in the second half of 2023. While overall living standards are expected to grow by 1.9% in the 2024/25 financial year, poorer households may not recover their pre-pandemic spending power until 2027.

In 2024, consumer price inflation is expected to average 2.2%, a significant decrease from the 7.4% observed in 2023. This decline is attributed to lower energy prices. The projection suggests that inflation will persist around the 2.2% level until 2028.

Additionally, the Bank of England (BoE) is anticipated to reduce the Bank Rate to 3.25% by 2026, which is two years earlier than the NIESR had initially predicted. NIESR urges the government to prioritize public investment over pre-election tax cuts to stimulate economic growth.

The US dollar experienced a decline against major currencies after reaching a three-month high. However, robust US economic data, including a strong unemployment report, and remarks from Fed Chair Jerome Powell have diminished expectations of early and steep rate cuts. The dollar's strength is expected to persist in the coming months, with currency speculators reducing their short dollar bets. The Federal Reserve's policy decisions and rate differentials against other central banks will play a crucial role in determining the dollar's trajectory. Analysts anticipate a gradual weakening of the dollar against major currencies over the next three, six, and 12 months.

Data for Technical Analysis (1H) CFD GBP/USD

Resistance : 1.2611, 1.2613, 1.2616

Support : 1.2605, 1.2603, 1.2600    

1H Outlook  

Source: Investing.com

Buy/Long 1 If the support at the price range 1.2600 - 1.2605 is touched, but the support at 1.2605 cannot be broken, the TP may be set around 1.2611 and the SL around 1.2598, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.2611 - 1.2616, TP may be set around 1.2619 and SL around 1.2603, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.2611 - 1.2616 is touched, but the resistance 1.2611 cannot be broken, the TP may be set around 1.2603 and the SL around 1.2618, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.2600 - 1.2605, TP may be set around 1.2596 and SL around 1.2613, or up to the risk appetite.       

Pivot Points Feb 7, 2024 03:09AM GMT