When downbeat forecasts don't come true, a currency has every chance to grow. That goes both for the euro and the pound. A recession may turn out not too deep and won't thus mean a fall of GBPUSD. Let’s discuss it and make a trading plan.
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Weekly fundamental forecast for pound sterling
Be prepared for the worst, as the best doesn't require preparations. Why is the pound growing if the British economy has already tanked into a recession, hasn't recovered after the pandemic in contrast to other G7 economies, and the Bank of England has delayed a rise in interest rates? The thing is, the slightest positive can inspire GBPUSD bulls when the market feels pessimistic.
Everyone talked about the UK's economic problems. The BoE was the first G10 central bank that forecast a recession. A recession that would last for five quarters in a row! Besides Brexit, the pandemic, and the energy crisis, the British Chambers of Commerce has mentioned one more trouble — turmoil amid the Liz Truss government's mini-budget. According to the BCC, a storm in financial markets hasn't been painless for the economy that now has to adapt to Rishi Sunak's higher taxes. As a result, GDP is expected to reduce by 0.9% in October-December, and the recession — to deepen in Q1-Q3 in 2023.
If the economy feels so bad, why does the sterling feels so good? Because reality can be much different from forecasts. The latest stats on Great Britain are more optimistic than the US', the eurozone's, or China's, the Citi Economic surprise index shows. So, the GBPUSD bulls feel enthusiastic.
Economic surprise index
Source: Reuters.
Is the BoE's monetary policy a headwind or a boost for the pound sterling? Hard to say. In contrast to the Fed and the ECB, there is no consensus among market forecasts for the BoE rate. When the REPO rate rose to 3%, the derivatives expected its peak at 4.75%, but it dropped to 4.6% in early December. However, the highest borrowing costs have been at 4.25%, Reuters experts estimate. HSBC, Wells Fargo, Royal Bank of Canada, and Julius Baer see them at 3.75%.
I think the reason for that is a split in the Monetary Policy Committee. Some members are desperate to fight inflation, while others are concerned about the economy. As a result, monetary policy becomes uncertain, which can support or weaken the pound. It currently supports the pound as the Fed's monetary restriction slows down.
However, Reuters believes the GBPUSD will depreciate 5% in three months and will be traded at 1.16.
Forecast for GBPUSD
Source: Reuters.
Weekly trading plan for GBPUSD
That can happen only if the US inflation unexpectedly soars. But if consumer prices in the US continue slowing down, traders will have a chance to build up longs in GBPUSD opened at 1.215. Slower CPI growth rates and a moderate rise in the FOMC's forecasts for the federal funds rate will increase the risk of the pound's rallying to $1.243 and $1.253.
Price chart of GBPUSD in real time mode
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