The slowness of the Bank of England helps GBPUSD, which is reasonable. The economy is recovering and price pressures are easing very slowly. Let us discuss the Forex outlook and make up a trading plan.
Weekly Pound fundamental forecast
The strength of the UK economy is helping the pound challenge the US dollar for the top spot among G10 currencies. Investors ignored retail sales, which fell by 3.2% MoM in December. Most likely, the negative dynamics are due to active consumer purchases on Black Friday in November. It does not mean that the economy went into recession. Data on business activity confirmed that everything is in order.
The acceleration of UK inflation to 4% and the growth of PMI to the highest level since June triggered the GBPUSD rally, while the pair practically did not react to weak statistics on retail sales. Over the past three weeks, traders have doubled their GBP net longs and brought them to their highest level since September.
Dynamics of UK business activity
Source: Financial Times.
According to S&P Global, PMI dynamics signal GDP expansion of 0.2% in the first quarter, indicating a recovery from zero economic growth in October-December. This gives BoE officials reasons to hold rates longer than other regulators and gives an important advantage to the pound. The derivatives market estimates the scale of UK monetary expansion in 2024 at 100 bps, and the American and European ones at 130 bps. Derivatives think the BoE will start cutting borrowing costs in June, the Fed in May and the ECB in April. A later decline implies maintaining high rates, which increases the attractiveness of assets and contributes to the GBP strengthening.
Interestingly, market pricing for the Bank of England is currently in line with Reuters experts' forecasts. 38 out of 70 economists believe that in April-June the interest rate will be reduced by 25 bps to 5%. Experts provide more conservative forecasts for the ECB and the Federal Reserve than derivatives.
The pound's strong position is justified. The UK economy looks better than the European one, and British inflation is higher than in the US and the eurozone. This allows the Bank of England to remain cautious and keep the interest rate at 5.25%. No MPC members are expected to vote in favor of its increase at the February 1 meeting. Something that hasn't happened for a long time.
It is hardly worth buying the pound against the US dollar, which may strengthen due to further improvement in US macro statistics or due to a correction in stock indices. The yen looks good in the context of normalization of the Bank of Japan's monetary policy. The pairs with the euro and the franc are interesting candidates for sales.
The different speed of monetary expansion of the ECB and the Bank of England allow entering EURGBP sales on correction in the direction of 0.84. The SNB's refusal of the strong currency policy creates the preconditions for purchases of GBPCHF at current levels in the direction of 1.114 and 1.123. GBPUSD is likely to maintain a tendency to consolidate in the range of 1.26-1.28.
Price chart of GBPUSD in real time mode
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