Last week, the British currency exchange rate reached the lowest value since the end of August and fell against the US dollar to the level of 1.3725.
An extremely negative factor for the pound was the news about the closure of some British factories due to the energy crisis in Europe. This is the first sign that the record increase in gas and electricity prices may slow down the country's economic recovery. CF Industries Holdings announced on Wednesday that it is shutting down production facilities due to high natural gas prices. At the same time, the company did not give any forecasts for the resumption of production. This is due to a serious shortage of energy resources in Europe and a record increase in gas and electricity prices. The continent does not have time to fill the storage facilities before the beginning of winter, as flows from leading suppliers from Russia and Norway are still limited. In addition, countries are competing for the supply of liquefied natural gas, while Asia is buying up cargo to meet its own demand. The crisis can lead to serious economic consequences.
According to Goldman Sachs, due to a sharp increase in prices, there may be a risk of power outages in the winter, which is likely to lead to an even greater increase in energy prices, increasing fears of inflation and increasing the costs of enterprises for raw materials. High energy prices put inflationary pressure on all other costs, which will eventually spread to consumers. Higher costs for heating homes will hit consumers ' wallets when they already have to pay more for food. At the same time, many are still struggling with the economic consequences of the pandemic.
The long-awaited meeting of the Bank of England will be held next week. For sure, the meeting will continue to reassess forecasts, started earlier this month by the chairman of the British Central Bank, Andrew Bailey, thanks to the August report on inflation in the UK. Forecasts now suggest that the interest rate will be raised by almost 40 basis points next year. The Bank of England noted that the level of 0.5% will be the minimum to which it is necessary to rise before starting to reduce the balance sheet. It is assumed that either the market is sure that the top of the current cycle will really be the level of 0.5%, or the Central Bank will face some problems when it stops reinvesting the proceeds from the repayment of bonds in its portfolio. This seems an incredibly distant prospect, but for the sake of completeness, the possibility of a partial sale of securities from its portfolio is being considered when the bank's interest rate reaches 1.5%. The Bank of England has already moved further along the path of tightening than its main competitors among advanced economies. Its strategy of reducing quantitative easing may be completed by the end of this year. But analysts still assume that it will be difficult for Central Banks to match the degree of tightening of the previous cycle. For the Bank of England, it is 0.75% and 2.5% for the Fed. This assumption, as well as the constant pressure on the bond market caused by the bloated balance sheets of central banks, means that investors do not have much doubts about chasing lower yields.
The forecast for the coming week assumes a corrective growth of the pound/dollar pair to the levels of 1.3725, 1.3750 and 1.3800.