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GBP/USD Plagued by Soaring Inflation, Energy Prices

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GBP/USD – Prices, Charts, and Analysis

  • UK energy bills jump by 80%.
  • Double-digit inflation is here to stay in the coming months.
  • GBP/USD remains under pressure.

As the UK starts a long weekend, news that millions of households and businesses will face a huge hike in energy bills will only add to fears that the UK economy is looking at a grim few quarters ahead. Government regulator OFGEM announced today that the typical household energy bill will hit GBP3,549 a year in October, an 80% increase from the current energy price cap of GBP1,971. And the situation is set to get a lot worse unless there is strong intervention from the government. According to Cornwall Insights, an energy, utilities, and environmental sector consultancy, energy prices may jump further, hitting GBP5,386 in January and just over GBP6,600 in April.

Soaring energy prices are the main driver behind one investment bank’s recent headline-grabbing note that UK inflation may hit eye-watering levels in the coming months. According to Citi economists, UK CPI may hit 18% in January while RPI is seen hitting 21%. Citi expects energy bills in the UK to hit GBP4,567 in January 2023 and GBP5,816 in April.

The new UK government – expected to be announced on September 5 – is going to have to act decisively and fast to temper these massive energy price hikes. Any energy price payments or subsidies will be needed immediately and will add to heightened inflationary fears in the UK. A 50 basis point rate hike is already fully priced in at the next BoE meeting on September 15, and markets are now starting to price in a Bank Rate of 4% next year compared to the current level of 1.75%. The UK gilt market has seen a sharp re-pricing of yields in August with the interest-rate sensitive two-year over 110 basis points higher since the start of the month.

British Pound (GBP) Forecast: GBP/USD Plagued by Soaring Inflation, Energy Prices

The UK economic calendar is fairly lean next week, leaving the British Pound susceptible to macro headlines and exterior factors. For all market-moving economic data and events, refer to the DailyFX calendar

Cable is little changed after the recent speech by Federal Reserve chair Jerome Powell at the Jackson Hole symposium left the audience no better off in terms of future Fed policy. Powell noted that a failure to restore price stability ‘would mean far greater pain’, while the Fed chair said that the central bank would ‘act with resolve’ to bring price pressures down. The highly anticipated speech left the market with a faint feeling of hawkishness but not enough to make a noticeable difference to the US dollar post-speech.

Fed Chair Jerome Powell’s Speech

GBP/USD is currently changing hands around the 1.1800 area and looks as though it wants to move lower. The current state of the UK economy and a US dollar with little reason to weaken leaves the recent 1.1718 low vulnerable.

GBP/USD Daily Price Chart – August 26, 2022

British Pound (GBP) Forecast: GBP/USD Plagued by Soaring Inflation, Energy Prices

Retail trader data show 78.14% of traders are net-long with the ratio of traders long to short at 3.57 to 1. The number of traders net-long is 1.19% lower than yesterday and 7.22% higher from last week, while the number of traders net-short is 6.77% higher than yesterday and 1.31% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/USD trading bias.

What is your view on the British Pound – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

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