GBP / USD price, chart and analysis
- Interest rates will rise in 2022, boosting the pound.
- Hard data remains critical in the fourth quarter.
The era of quantitative easing (QE) in the UK is coming to an end and the Bank of England (BoE) may well start raising interest rates in early 2022 as inflation begins to haunt the UK economy. The UK central bank will complete its £ 895 billion bond buying spree by the end of this year, effectively tightening monetary conditions and setting the stage for a rise in UK interest rates in 2022. L QE was introduced in response to the 2009 global financial crisis, with an initial size of £ 200 billion, has grown fivefold in total over the next 11 years to reach its current total. The bond buying program has effectively lowered UK interest rates due to the addition of liquidity to the system, and the reverse now seems likely at the end of the program. Money markets are currently anticipating an interest rate hike of 15 basis points by the first quarter of 2022 and another 25 basis point hike for the rest of the year. Now it looks like the Bank of England will be one of the first major central banks to raise interest rates, supporting the pound sterling.
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The UK economy is currently in a tight spot, with growth stalled due to the remnants of Covid-19 lockdowns running through the system, while supply bottlenecks are frequently cited by companies to across the country. And with price pressures on the rise, the dreaded word “stagflation” is starting to make an unfortunate comeback. Annual inflation in the UK is currently at 3.2%, above target, and is expected to rise to over 4% in the fourth quarter before returning to target. However, as seen in the United States, transient inflation can easily turn into sticky inflation and this would pose a problem for the MPC, especially if growth continues to slow.
The UK labor market remains a positive point for the economy with around one million jobs available, the highest level since the record began. Recent data from the ONS showed 1,034,000 vacancies between June and August, or nearly 250,000 additional job vacancies before the pandemic, while the unemployment rate is estimated at 4.7%, or a little less than 1% more than pre-pandemic levels. The effect of Brexit, with large gangs of EU youth who worked in the hospitality industry leaving the country, and the government’s leave program have left employers scrambling to find workers, with the rise wages which will likely result in inflation in the coming months. The leave scheme is currently expected to end by September 30 and the resulting flow of workers may help fill some of the available positions, but with the economy still expected to grow at a decent rate going forward, the The job market could remain tight in the coming month.
We have been quite constructive on the pound sterling this year and see no reason to change this fundamental outlook. The covid-19 vaccination program has been a great success with almost 90% of the population over 16 having received at least one dose, while 82% have had two vaccinations. New cases and deaths, however, remain at an unacceptable level as the expected slowdown in both has yet to be observed and these numbers must drop sharply and stay low before the government can mark the success of the program. The British pound is expected to rise slightly against a range of other currencies in the last quarter of this year, boosted by this vaccination program, interest rate hikes expected in 2022 and a strong national economy.
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