2023.09.07 2023.09.07
Pound bit off more than it could chew. Forecast as of 07.09.2023Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/
In mid-summer, investors believed the REPO rate would rise to 6.25%, but its projected peak dropped to 5.75 % by the beginning of autumn. Meanwhile, BoE’s comments on ending monetary restrictions harm the GBPUSD. Let’s discuss it and make a trading plan.
Weekly fundamental forecast for pound sterling
First, try, and then trust. The market ignores Andrew Bailey’s saying that the REPO rate may not have to rise any further, just like it ignores Jerome Powell’s statement that the fed funds rate may grow to 5.75%. The derivatives market still hopes for a repo rate hike, but if that doesn’t happen, the GBPUSD’s fall will be only the beginning.
The pound sterling has been the leader in the C10 currency race for most of the year. The UK economy handled the 2022 government crisis and avoided a long recession projected by BoE. At the same time, the inflation in the UK is higher than in the euro area and the US, which demands that BoE raise rates more aggressively. However, if the pound sterling strengthened by 8.6% against the USD at the peak in mid-July, that figure hardly exceeds 4% by the beginning of autumn. Most of the GBPUSD bulls’ advantage was lost.
UK and foreign inflation trends
Source: Bloomberg.
The reasons are the US economy’s resilience to the Fed’s aggressive monetary restrictions and the growth of treasury yields. Greenback fans are not even worried that the Fed is about to end the tightening cycle.
At the same time, derivatives estimate the chance of raising the repo rate from 5.25% to 5.5% in September at 90% and forecast a rise to 5.75% in November. If that happens, the BoE’s borrowing costs will be the highest among G10 currencies for the first time in more than 40 years.
Market expectations of REPO rates
Source: Bloomberg.
However, that will hardly happen as the BoE’s policy depends on data. The growth of consumer spending in the UK is slowing, while non-manufacturing business activity dropped below the critical level of 50 for the first time since January, signaling a potential economic downturn. Unsurprisingly, BoE officials indicate clearly that further tightening may result in a too drastic decline.
Andrew Bailey thinks many indicators perform as expected, so inflation will slow even more by the end of the year. At the same time, the UK economy has not fully felt the repo rate hike from 0.1% to 5.25%. It’s about to feel it, so borrowing costs should probably not rise further. Huw Pill and Ben Broadbent think the same.
The chief economist believes holding the rate on a plateau at 5.25% will allow slowing inflation to 2% in 2025. There’s no need to tighten policy further and then ease it.
Weekly trading plan for GBPUSD
The speeches from the Bank of England show a serious shift in its views, which is a negative factor for the pound. It can improve its position as a procyclical currency if the global economy improves. Meanwhile, think about selling the GBPUSD if it falls below 1.247 or on a pullback from resistance at 1.2535 and 1.261.
Price chart of GBPUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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