Pound Yawns After Bailey Warnings

05/17/2022

1 minute read

2022.05.17 11:16

The British pound is trading quietly on Monday, as the currency markets have started the week with a whimper.

BoE’s Bailey says dark times ahead

BoE Governor Bailey testified before lawmakers earlier today, and his message was a grim one. The BoE has predicted that soaring inflation could top 10%, and Bailey admitted that “this is a bad situation to be in.” Bailey said that the Ukraine war could cause a further energy shock and that his concern about the surge in food prices was “apocalyptic.”

Bailey gets full credit for not sugar-coating what is a difficult economic situation, but his candidness will not help support the struggling pound, which hasn’t posted a winning week since mid-Apr. I appreciate Bailey’s honesty, but the BoE has run into a credibility problem with its rate policy in recent months, and it’s questionable whether his message that dark times lie ahead is the way to restore confidence in the central bank.

The economic picture in the US is brighter, but the Fed’s aggressive policy will lead to a slowdown in growth. The big question is can Fed Chair Powell guide the economy to a soft landing and avoid a recession. On Sunday, Goldman Sachs lowered its forecast for US growth to 2.4% in 2022 and 1.6% in 2023, down from 2.6% and 2.2%, respectively.

Federal Reserve officials last week reiterated their intention to deliver 0.50% rate increases at the June and July meetings, which will help limit US dollar gains. At the same time, any US data that is worse than expected could lead to calls for a hike of 0.75%, which would be bullish for the US dollar.

Pound Yawns After Bailey Warnings GBP/USD Daily Chart