At first glance, the British pound and the US dollar can be called twins. After an impressive second quarter, the economies of the two countries risk slowing down in the third, labor markets are recovering, inflation is high, and issuing central banks are on the path to normalizing monetary policy. Investors expect hawkish rhetoric from the meetings of the Bank of England and the Fed with a difference of one day. Nevertheless, the GBP/USD pair, instead of entering into consolidation, falls like a stone, allowing us to form successful shorts from levels above 1.38. What is the matter? Why is sterling weaker than the dollar?

In my opinion, the crux of the matter is in different depths of the recession, the speed of economic recovery, and the fact that the UK is now much closer to stagflation than the United States. UK inflation has accelerated to 3.2% and is likely to rise to 4% by the end of the year, while the fourth consecutive monthly decline in retail sales, which has not happened in the last 25 years, hints at another decline. The indicator sank 0.9% in August after falling 2.8% in July. Given the importance of consumer spending for GDP, it is becoming alarming for the economy. In addition, it has not yet got out of the hole, unlike its American counterpart, which fully recovered in the second quarter.

UK retail sales dynamics

Thus, unlike the Fed, which received good news from US retail sales, the Bank of England should seriously consider whether to tighten monetary policy. Yes, raising the repo rate will hit inflation, but at the same time slow down GDP growth. In this regard, market expectations about an increase in borrowing costs in Britain not only in May, but also in December 2022 look too hawkish. Andrew Bailey and his colleagues face tough choices, and the lack of a hint of monetary tightening could make the pound a whipping boy. Ultimately, currencies and other assets are growing on expectations, and the GBP/USD quotes probably already have a factor in raising the repo rate at least once next year.

Dynamics of market expectations for the repo rate

Thus, if investors expect "hawkish" surprises from the Fed, then the Bank of England should not exclude the receipt of "dovish" news. This circumstance contributes to the fall of GBP/USD quotes and a fair question: when will the pair find the bottom? There are two possible answers. Either the Federal Reserve will disappoint investors, after which profit-taking on longs for the US dollar will begin, which will smoothly turn into sterling purchases based on BoE optimism, or Jerome Powell and his colleagues will not delay the start of QE curtailment and at the same time shift the consensus forecast for the rate for 2022. The US dollar will continue to rally against major world currencies.

Technically, the further fate of GBP/USD will depend on the ability of the "bulls" to return above 1.3725, where the lower limit of the fair value is. It will turn out – a correction to 1.377 and 1.3815 may follow. No – we will have the opportunity to build up the shorts formed above the base of the 38th figure in the direction of 1.358 and 1.349.

GBP/USD, Daily chart