Where Will Increased Inflation Take the Pound Sterling?

Market Leader informed

The quarterly report of the Bank of England on inflation became last week’s key event.
Last year the pound’s first response to the BoE November report was a fall, this year, high inflation rates registered at 3.1% made the British currency stronger.
The Bank of England diplomatically evaded any forecasts in terms of when and how much inflation would be decreased and suggested that it would be facilitated by a sales tax and lower import prices. It was also stated, however, that the Bank was prepared to react to any scenario. 

 

Only a month ago Mervin King, Governor of the Bank of England, said it was necessary to consider the issue of the next stage of quantitative easing as the British economy is suffering from lack of money which affects economic growth rates and slows down reduction of the inflation.

 

However, Great Britain decided not to follow in the US’ wake and reject the next round of quantitative easing. Experts responded to this step reservedly in a belief that the British government should better return to tactics identical to that of the US despite positive economic news.

 

So, based on data from the National Bureau of Statistics, the impulse for development was given to industrial production whose output in September showed a MoM increase. This also concerns, but is not limited to, mining, oil and gas, energy industries.
PMI Manufacturing grew to its two-year high. Production growth is demonstrated by half of the manufacturing industries, including foods, tobacco, metals, chemicals.
Economists believe the trend will continue and will not be stopped by even weak domestic demand.

 

Prices started going up in the country, too. Increased oil prices spurred Great Britain’s producers to raise their annual prices. The National Bureau of Statistics points to the fastest monthly growth of manufacturers’ purchasing prices since March 2010. The basic index of manufacturers’ sale prices added 3.3%. The index of manufacturers’ sale prices grew by 4.0%.

 

Nevertheless, people tend to speak of pronounced positive trends that can take the country’s economy out of the stupor with hope and a large degree of doubt. There is an opinion that further injection of liquidity can provoke higher prices unless economic activity is encouraged.

 

GBPUSD Technical Analysis

 

At the beginning of the current trading session GBPUSD continues forming a short-term bullish wave in the forex market which can turn into either H4 Wave b(C) within the medium-term bearish dynamics or a reversal H2/3 Wave A. The Moment of Truth against the bullish wave will help us find out the scenario of further events.
So far, the currency has been moving within the protective Sloping Channel. The pivot at 1.6181 is the last protective borderline for a move up.

 

It will face the following resistance levels above:

1.6066 – Sloping Channel + 50% of Н8 retracement;
1.6120 – 62% of Н8 retracement;
1.6181 – MF Pivot +76% of Н8 retracement;
1.6298 – Fractal-zigzag reversal (FZR).

 

There are support levels below:

 

1.5866 – MF Pivot;
1.5836 – FZR + 138% Н4 a(C);
1.5776 – 150% Н4 A + 123% Н4 a(C);
1.5735 – 162% Н4 А + 88% of Н12 retracement + MF Pivot;
1.5648 – MF Pivot.

 

 

What are the benefits of a weak pound?

 

To start with, a weak pound contributes to increased demand for British goods. The pound is already meeting this mission. According to the National Bureau of Statistics, it’s probably because of the weaker pound that exports grew in September (2.2%) faster than imports (0.8%). So, the trade deficit went down to 8.2 bn. pounds.
Great Britain is more actively developing trading relationships with EU countries as supported by data for the first month of this Fall. The trade deficit vis-à-vis European neighbors is 1 billion dollars less than with non-EU countries (3.6 bn pounds vs. 4.6 bn. pounds).
This was in September. Total Q3 figures are 2 bn. higher than in Q2. The trade deficit in goods was 25.2 bn. pounds. The trade deficit in oil also grew to 2.2 billion pounds.

The weak pound will be, apart from other players, interesting for foreign purchasers of real estate.
English apartment prices have been going down for a third of the year already. Homes lost another 0.9% of their worth in October showing the maximum slump over the past 22 months.
Great Britain is characterized by this picture: supply of real estate is rising, including the new homes market, while demand is declining. These conditions and the forthcoming Christmas holidays suggest that prices will continue their downward trend within the next six months.

 

As estimated by representatives of the country’s main financial agency, Great Britain’s economic growth will slow down next year and pick up later. However, Great Britain can protect itself if ‘the decline in global economy persists’ and one should keep this in mind when forecasting the movement of the British currency against the dollar, and its cross rates.

 

You can express your opinion on this matter by taking part in a survey of the Faculty for Detailed Learning of the Masterforex-V Trading System .

 

How will the British pound be affected by inflation rates higher than target figures?

 

* The pound will be stronger
* The pound will be weaker
* The report will not serve as basis for drastic movements of the currency in any specific direction

 

Technical analysis has been conducted by the Faculty for Learning of the Masterforex-V Trading System .

 

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