Trading the British Pound Amid Recession Fears

November 06, 2023 10:42

The UK pound’s value against other major currencies such as the US dollar and the euro has suffered as the UK economy faces high inflation figures and the impact of the Bank of England’s (BoE) strict monetary policy.

On November 2nd, the BoE’s Monetary Policy Committee (MPC) announced that it would keep borrowing costs on hold with the economic growth forecast showing that recession in 2024 could be on the way.

Let’s see the latest updates regarding the UK economy and the British pound trading amid recession fears.

BoE Rates Likely To Stay High For Extended Period

The BoE’s governor, Andrew Bailey, said in his post-meeting remarks that the MPC decided to keep interest rates on hold, as it was largely anticipated by economists. The BoE kept rates unchanged for a second consecutive time and at the highest level since the 2008 financial crisis.

While the BoE’s decision didn’t surprise financial markets, it was another element of the post-meeting report that drew market analysts’ attention. The economic growth forecast indicated that there is an increased chance that a recession could hit the UK economy next year.  

The BoE GDP growth forecast suggested that the growth rate could flatline throughout 2024 with a 50-50 probability of a recession starting after the spring elections.

Commenting on the BoE’s monetary policy, Andrew Bailey noted: “It’s much too early to be thinking about rate cuts. Higher interest rates are working and inflation is falling. But we need to see inflation continuing to fall all the way to our 2% target. We’ve held rates unchanged this month but we will be watching closely to see if further rate increases are needed. But we should not keep monetary policy restrictive for excessively long. We have to be mindful of the balance of risks between doing too little and doing too much.”

What Do Analysts Forecast About The UK Economy And The British Pound

ING analysts suggest that higher interest rates could act as a growing drag on UK activity. In a report released on November 3rd they noted: “The Bank of England’s rate hike cycle has almost certainly concluded, and the focus is now switching to rate cuts. Policymakers are adamant that these are a long way off, a view that markets have largely bought into. While we’ve seen a big repricing lower in UK rate expectations this summer, investors still expect Bank Rate to stay north of 4% for the next three years.”

Economists at TD Securities said that the BoE supported the British pound with its “hawkish” stance adding that “looking at market expectations of cuts over next year, it seems like there is still more optimism on the UK economy vs. the Euro area, whereas we expect the BoE to lead the global cutting cycle amongst peers. Accordingly, we see some EUR/GBP upside as markets keep moderating hawkish expectations for the UK. We like GBP lower vs. peers like AUD and NZD where the growth inflation outcomes don't look as meek and where some catch-up is forthcoming.”

Danske Bank’s economists found the BoE’s decision in line with their expectations. Commenting on the EUR/GBP pair, they wrote that “we continue to see relative rates as a moderate positive for EUR/GBP with room for further cuts being priced in for 2024. We still expect the relative performance of the Euro area and the UK economy to be a relevant driver. We target a modest rise in EUR/GBP to 0.89 in 2024.”

Analysts at MUFG published a report in which they reiterated that “The updated policy messages from the Fed and BoE were both similar in our view signalling it was more likely that no further hikes would be required but not going as far as completely ruling it out. The developments support our outlook for the Pound to weaken further. The UK rate market is currently pricing in around 55 bps of cuts by the end of next year. We still expect the BoE to deliver more cuts next year than currently priced.”

Commerzbank’s currency analysts suggested that there might be scope for the British pound’s temporary recovery. In their note to traders, they mentioned that “BoE Governor Andrew Bailey underlined repeatedly during the press conference that price stability was the BoE’s mandate rather than preventing a recession for example. Moreover, it was premature to consider rate cuts. The market seems to be buying that. The question is whether the BoE will also stick to these comments if inflation turns out to be more stubborn. For now, however, the market seems to be content and Sterling might have scope for a temporary recovery.”

Risk Management When Trading The British Pound

The UK pound is one of the most traded currencies in the world. Currency pairs that include the British pound such as the GBP/USD and the GBP/EUR are among the most popular for traders. These pairs enjoy media publicity as many traders tend to include them in their portfolios, so information and analytical articles are in abundance.

Beginner traders may get tempted to add the British pound pairs to their portfolios as they start their trading journey. However, trading the British pound involves risks that could lead to loss of funds if wrong decisions are made. It is important for beginner traders to boost their knowledge around trading by watching webinars and other such educational videos, reading articles and how to guides, etc.  Educational materials can be found online and could play a role in the success of a beginner trader’s strategy.

Learning to use risk management tools available in popular trading platforms such as the MT4 and the MT5 is also quite important. By utilising risk management tools, beginner traders have the opportunity to build their strategies while reducing the probability of losing significant amounts of funds in case markets turn against them. Improving the level of trading knowledge helps beginner traders enjoy the experience with less stress and anxiety.

Does trading on macroeconomic news interest you? Learn how this approach works with our free webinars. Meet and interact with experienced traders. Watch and learn from live trading sessions.

Free trading webinars

Tune into live webinars hosted by our trading experts

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Miltos Skemperis
Miltos Skemperis Financial Content Writer

Miltos Skemperis’ background is in journalism and business management. He has worked as a reporter on various TV news channels and newspapers. Miltos has been working as a financial content writer for the last seven years.