FXTM information and reviews
OctaFX information and reviews
XM information and reviews
FXCC information and reviews
FxPro information and reviews
HFM information and reviews

UK banks favor inflationary measures over GBP Price

16 January 2023

Currencies are sensitive and affected by everything from war to weather, politics to pandemics. Forecasting a major currency usually takes time, diligence, and a lot of data… but that might not be true for GBP in 2023. Should you short GBP this year? The Great British Pound had one of the most volatile years on record in 2022 against USD, its worst annual performance since Brexit in 2016. GBP has been on the decline for over 50 years, but in September 2022, GBPUSD almost traded at parity, dropping as low as 1.0697. The last time GBP was that low was in 1984. 

Clearly, the UK has had challenges over the last few decades, but the hardship is far from over.

UK interest rates spiraling

When the UK’s inflation is high, there is a depressive effect on GBP. This is because increased inflation reduces GBP’s buying power, weakening it against other currencies. As inflation rises, the Bank of England (BoE) has no choice but to raise interest rates. Interest rate hikes typically boost currency value.

In November 2022, the BoE raised the interest rate by 75-basis points, taking the benchmark rate to 3%. The biggest rate change to happen in 33 years. And then in December, the BoE raised rates by an additional 50 basis points. That was the ninth interest rate hike of the year. Even with so many interest hikes, GBP did not fare well. So why didn’t it work?

High interest rates can also crush consumer confidence, increase unemployment, and decrease salaries. It’s a delicate balance, allowing inflationary fires to burn wild for a while, before powering up interest rates to calm the economy. High interest rates mean the borrower has less cash to spend on other things. Less spare cash means households spend less. Less consumer spending means businesses will avoid raising prices. The sign of a strong economy is when both inflation and interest rates are low. The UK is suffering from both high inflation and high interest rates, but they are fighting to regain solvency.

2022 damage control

Raising interest rates can help in the long run. The trouble is, it can take as much as two years to see raised interest rates having a full effect on inflation. Fortunately, the BoE was on damage control throughout 2022, placing costly economic cushions throughout the UK’s financial infrastructure in preparation for a big drop. That was the volatility of 2022 that created such astonishing and bearish GBP trading charts.

As a result of the 2022 damage control, GBP might be over sold and undervalued right now… a desirable situation for the Brits right before a recession. The only question, are the measures enough to keep GBP above parity with USD?

Trading GBP in 2023

The Consumer Prices Index (CPI) rose by 10.7%, the highest annual inflation rate in over 25 years. High inflation devalued GBP, so the BoE raised interest rates to 3.5% in response. Rising interest rates are supposed to have a bearish effect on GBP, so is it a buy low, sell high moment? GBP might be low, but that doesn’t mean it won’t get lower. There’s nothing on the horizon that could give GBP a positive boost, and now multiple statements from UK and international economists are claiming the UK will be one of the hardest hit countries in Europe when the recession finally kicks in.

The UK is still suffering from post Brixit fallout in banking and import/export sectors. Then there’s the growing energy crisis, and COVID aftermath. Changing Prime Ministers with every season doesn’t help investor confidence or market sentiment either. Most relevant is what the BoE said recently. It would rather see a weaker recession than a weaker currency. That opens the door to currency value crashes as inflation compensation becomes a priority in 2023.

If you do plan on trading GBP, keep an eye on the UK’s inflation and interest rates. If both inflation and interest remain high or increase while GBP doesn’t show signs of recovery, the UK and GBP are in deeper water than we all think. Trading volume could be epic in the coming months, and overbought/oversold scenarios will be common, so your reaction times will need to be fast to maximize your trading potential.


Share: Tweet this or Share on Facebook


GBPUSD D1: Bullish sentiment is on the rise
GBPUSD D1: Bullish sentiment is on the rise

GBPUSD on the D1 time frame was in a short and choppy down trend until 8 March when a last lower bottom was recorded at 1.18016. Bullish sentiment took over and prices started to climb...

23 Mar 2023

GBP rose steadily
GBP rose steadily

The British pound sterling has risen markedly against the US dollar. The current quote in GBPUSD is 1.2164. The UK released employment sector statistics on Tuesday...

15 Mar 2023

GBP is retracting elegantly
GBP is retracting elegantly

The British pound against the US dollar is declining. The current quote is 1.2000. The head of the BoE Andrew Bailey voiced yesterday that nothing had been decided...

3 Mar 2023

GBP is retracting elegantly
GBP is retracting elegantly

The British pound against the US dollar is declining. The current quote is 1.2000. The head of the BoE Andrew Bailey voiced yesterday that nothing had been decided...

2 Mar 2023

GBP/USD manages to defend and rebound from 200-day SMA amid a modest USD downtick
GBP/USD manages to defend and rebound from 200-day SMA amid a modest USD downtick

GBP/USD continues to find some support and attracts some buyers near the 200-day SMA. A modest USD pullback from a multi-week high is seen as a key factor acting as a tailwind...

27 Feb 2023

GBP: hidden powers
GBP: hidden powers

The British pound against the US Dollar has recovered after a previous wave of decline. The current quote is 1.2142. Britain presented the first block of macro statistics scheduled for this week...

15 Feb 2023

FXCM information and reviews
RoboForex information and reviews
MultiBank Group information and reviews
MultiBank Group
Libertex information and reviews
Vantage information and reviews
FP Markets information and reviews
FP Markets

© 2006-2023 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.