The exchange rate of the British currency fell against the US dollar to the support of 1.3760 and reached the lowest since April of this year. The pound will not recover if the Bank of England's policy makers do not start signaling an earlier-than-expected interest rate increase. A representative of the Monetary Policy Committee said last week that the Bank of England may suspend its bond-buying program ahead of schedule in order to curb inflation.
Michael Saunders noted that the continuation of bond purchases at the end of this year risks strengthening inflation expectations. According to data published last week, in May, consumer price inflation in the UK jumped to 2.5%. At the end of the year, the price increase may exceed 3%. According to Saunders, the issue of early completion of the asset purchase program will be considered at the upcoming meetings of the Central Bank. If the indicators of activity and inflation are consistent with the latest trends, and the risks of a decline in economic growth and inflation do not increase significantly, then it may soon be advisable to cancel some of the current monetary incentives. Options for tightening policy include ending the bond purchase program a month or two before its completion at the end of 2021 and further measures in 2022, not excluding an interest rate increase.
Saunders' comments increased the likelihood of a change in the Bank of England's position, as inflation rises sharply, and the strengthening of the labor market reduces fears of a sharp increase in unemployment after the end of government support at the end of September. The deputy governor of the Central Bank, Dave Ramsden, said that this year inflation could even reach 4%, and it may be necessary to cancel monetary stimulus earlier than planned. So far, the Bank of England has argued that inflationary pressures due to higher energy prices and supply chain bottlenecks will be temporary, as Western economies have adjusted to reopening after the pandemic.
Despite Saunders' harsh comments, the British pound again did not hold its position against the dollar and fell by almost 150 points from a weekly high. Market participants are still not sure about the Bank of England's determination to tighten monetary policy ahead of time, or at least declare it, following the example of the Fed. In addition, the risks associated with possible new lockdowns are growing in the foreign exchange market, so interest in protective assets, including the dollar, is increasing again.
The exchange rate of the Pound/Dollar pair has reached a strong support, below which the pair has not fallen since mid-April. There are no key indicators scheduled to be published in the UK next week, which could drop the national currency exchange rate even lower. At the end of the week, retail sales data and business activity indicators in the manufacturing sector and in the service sector will be announced. Most likely, the pair will remain near the support level and slightly adjust upwards in anticipation of new information from the Bank of England.
In our forecast, we expect a decline in the Pound/Dollar exchange rate to the levels of 1.3730 and 1.3700, after which we assume a pullback of quotations to the levels of 1.3760, 1.3800 and 1.3825.