09.09.202411:20 Forex Analysis & Reviews: Pound Enters a Dark Period

The British pound fell victim to the US labor market report for August, yet its own economic troubles could pull GBP/USD into a correction. Labour urgently needs funds to cover a nearly £22 billion budget gap revealed after the Conservative government. With the national debt at 100% of GDP, the highest in nearly 60 years, this requires tax increases, which is not the best news for the economy and sterling.

Dynamics of UK National Debt

While the US non-farm employment growth of 142,000 in August did not meet Bloomberg experts' forecasts, it does not suggest the labor market is going down. It is cooling at a moderate pace, so there's no need for a drastic 50 basis point cut in the federal funds rate in September. As a result, after initially rising to 1.323, GBP/USD took a rollercoaster ride.

It seems the markets are overestimating the scale of the Federal Reserve's monetary easing in 2024, demanding a reduction in borrowing costs by 112bps. Ideally, it would cut rates by 75bps this year. If so, the US dollar will come back into play as it did in the first quarter. In contrast, the anticipated pace of monetary policy easing by the Bank of England looks too slow. What's 40bps by the end of the year? One step of 25bps with some chance of a second? Isn't that too little for a country whose inflation has already hit the 2% target?

Dynamics of Market Expectations for the Federal Funds Rate

BoE Governor Andrew Bailey and his team are capable of more. If earlier, the BoE was restrained by too fast wage growth and high core inflation, following the labor market data for July, many things could change. Bloomberg experts predict a slowdown in wage growth from 4.5% to 4.1%. GDP, trade balance, and industrial production could present unpleasant surprises.

Speculative long positions in sterling are valued at $7.45 billion, close to the July record. In such a situation, even slight negative news can trigger an avalanche of profit-taking and carry GBP/USD downwards. Moreover, Huw Pill is scheduled to speak on September 12. The chief economist voted for a cut in the REPO rate at the previous meeting, and his dovish rhetoric could accelerate the pound's correction.

Bloomberg experts also talk about a pullback. They predict that by the end of the year, GBP/USD will be trading at the level of 1.3. Moreover, the pair's decline may become protracted if the market starts to factor in expectations of Labour's tax increases in October. In the context of fiscal consolidation, both the economy and inflation risk slowing down. This will prompt the BoE to reduce the REPO rate.

Technically, on the daily chart of GBP/USD, the combination of the Three Indians and 1-2-3 patterns opens the door for a correction. Falling below 1.3110 and 1.3085 should be used to form short positions.