Article 16 Stagflation and Risks

British Pound (GBP/USD) Weekly Fundamental Forecast: Bearish

  • UK inflation headlines next week’s top risk events as growth outlook limits the duration and depth of the BoE’s rate hike path
  • Northern Ireland Protocol issue comes to the fore after Northern Ireland Assembly elections and latest EU proposal

Source: Trading View, prepared by Richard Snow

UK inflation data could prolong pound woes

May 5andbank of england (BoE) proposed a 25bp hike – with a third of the committee preferring a 50bp hike – still managed to be seen as accommodating. This was of course due to the Bank’s great concern about lower growth in the coming months. These fears have already materialized via March GDP data that revealed a monthly contraction of 0.1%. According to the Bank’s latest forecast, GDP growth is expected to cancel out in the second quarter of 2023 and turn negative towards the end of next year before recovering in 2024.

The current weaker environment, referred to as “walking a narrow path”, is certainly not ideal but has been vindicated by the BoE in the face of persistently rising inflation. Next week we have the UK CPI data on Wednesday that could see a rather unconventional response to an upward inflation surprise. Generally, a higher than expected impression is positive for the currency concerned as it implies a higher future interest rate which the markets begin to integrate immediately. However, for the UK, higher inflation exacerbates the current compression in the cost of living during a period of contraction in growth, which could lead to further bearish GBP/USD prices.

British Pound (GBP) Weekly Forecast: Stagflation and Article 16 Risks

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Market expectations are in line with the BoE’s current stance of moderate interest rate hikes over the next few periods with 25 basis points expected at the June meeting, while remaining just short of another hike. 25 basis points in August.

Implicit rate hike via UK money markets

British Pound (GBP) Weekly Forecast: Stagflation and Article 16 Risks

Source: Refinitiv, prepared by Richard Snow

UK rejects latest EU proposal for NI Protocol

Earlier this week the EU tabled a proposal which it says reduces paperwork and checks on goods entering Northern Ireland from the UK. The UK government, however, pointed out that the proposal would “worsen current trade agreements”.

The risks of triggering Article 16 resurface as Foreign Secretary Liz Truss issued a statement on Tuesday stressing her preference for a “negotiated solution”, but drew a hard line adding that she would not rule out, “taking steps to stabilize the situation in Northern Ireland”. if solutions cannot be found.

Discontent around the NI protocol came into the limelight this week after Northern Ireland Assembly elections were held last week and could worsen the already deteriorated fundamental outlook for the euro and the pound.

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnotowFX

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