Pound is deadlocked. Forecast as of 02.02.2023

2023.02.02 2023.02.02
Pound is deadlocked. Forecast as of 02.02.2023logo

No one can confidently say how the BoE will act in February. Inflation is above 10%, which is pushing the central bank to raise interest rates aggressively, but the economy is weak. Let us discuss the Forex outlook and make up a GBPUSD trading plan.

Fundamental pound forecast today

A weak economy, high inflation, and a dispute among the BoE members. It seems that the UK is watching the same first act of the play while the US has already moved on to the second. It doesn’t matter that the BoE started the monetary tightening cycle earlier than the Fed did. It started selling bonds purchased under QE also earlier. Some economists even suggest that the BoE should be the first to pause monetary restrictions after raising the bank rate by half a point in February. However, hardly anyone can say for sure what exactly the regulator will do. And this uncertainty is driving the GBPUSD into consolidation.

Even a major improvement in global risk appetite and a weakening US dollar since the first FOMC meeting in 2023 failed to strengthen the pound. In the UK, unlike the USA, nothing changes. The IMF still considers the UK economy the weakest in the G7, lowers its GDP growth forecast for the current year by 0.9%, and predicts a recession of -0.6%. Given that estimates of global economic growth were raised to 2.9%, one can say that the UK economy and the sterling are under pressure.

Projections for G7 economies

Source: Bloomberg.

Consumers face high energy prices, borrowers face high interest rates on loans, and taxpayers face high taxes – these are named as the main reasons for the downturn. Furthermore, government spending is cut, and the labour market doesn’t suggest much optimism. So, the future of the UK economy doesn’t look so bright.

Nevertheless, pessimistic forecasts are unlikely to stop the Bank of England from the 10th act of monetary restriction in a row and the growth of the interest rate to 4%, the highest level since 2008. Inflation in the UK seems to have passed its peak but is still at an unacceptably high level of 10.5%. It seems that previous steps along the road of tightening monetary policy are not producing results.

Dynamics of leading central banks’ interest rates

Source: Bloomberg.

The stagflationary environment makes BoE more divided than ever. At the December meeting, the majority of MPC members voted in favor of raising borrowing costs by half a point, but one official suggested a wider move, and two others did not want any change. What will happen in February? Will the balance of power change? The derivatives market is not sure about raising the BoE rate by half a point, although it considers this option the most probable. Derivatives lowered expectations for a rate ceiling to 4.5% from 4.75% in November.

GBPUSD trading plan today 

Thus, unlike the Fed, which will soon pause the process of monetary restriction, or the ECB, whose determination in the fight against inflation is not in doubt, the Bank of England is uncertain. It could easily surprise investors with a smaller increase in the bank rate, which will send down the GBPUSD towards 1.225 and 1.22. If the UK regulator meets the market expectations, then medium-term buy targets will remain at 1.268 and 1.28.

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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