Pound is weakened by divergence. Forecast as of 16.02.2023

2023.02.16 2023.02.16
Pound is weakened by divergence. Forecast as of 16.02.2023logo

After a significant decline in core inflation, it became clear that the Bank of England could afford to relax. The Fed is getting more hawkish, which creates a divergence in monetary policy. Let us discuss the Forex outlook and make up a GBPUSD trading plan.

Weekly fundamental pound forecast

A faster decline in UK inflation than expected by Bloomberg experts amid a stagnating economy suggests divergence between the USA and the UK. Consumer prices in the US accelerate to 0.5% M-o-M, the federal funds rate could be raised to 5.5%, and the US economy is expanding instead of a hard or soft landing. Therefore, such discrepancies press down the GBPUSD. The shorts entered on the rebound from 1.221 yielded profit.

In January, UK consumer price growth slowed down from 10.5% to 10.1%, and core inflation — from 6.3% to 5.8%, which is significantly lower than the 6.2% expected by Bloomberg experts. With gas prices skyrocketing and the worst cost-of-living crisis in decades, consumers are reluctant to spend money on goods, causing prices to slow down. It seems that inflation in the UK has passed its peak, and this suggests that the BoE interest rate should soon reach its ceiling and then start declining. At its February meeting, the Bank of England was talking about exactly this, and now his theory has been supported by facts.

Dynamics of inflation in USA, UK, and euro area

Source: Bloomberg.

After the release of data on consumer prices, the derivatives market expects that the interest rate to rise not to 4.7% but to 4.5%, which means two more rate hikes before the end of the cycle. After that, a dovish shift will occur, a transition to monetary easing until the end of 2023. ING even believes that the 25-basis-point rate hike in March will be the last one, as prices continue to slow down, and BoE pays increased attention to the effect of a delayed impact of monetary tightening on the UK economy.

The UK economy is already weak, which is another barrier to continuous monetary tightening. Zero GDP growth in the fourth quarter of 2022, the worst performance of the gross domestic product in 2023 among the G7 countries, according to the IMF, and the pessimistic forecasts of the Bank of England for an economic recovery to pre-pandemic levels by 2026, are all bearish drivers for the sterling. It is obvious that the GDP growth rate is declining, which, amid the rise in the US GDP, dictates the need to sell the GBPUSD.

Dynamics of UK economy

Source: Bloomberg.

Thus, there is a divergence in the inflation rates, economic growth, and in the monetary policy of the Fed and the Bank of England. Moreover, the euro-area economy looks better than in the UK, and the ECB is more aggressive than the BoE. According to Christine Lagarde, at the next Governing Council meeting, the ECB rate will rise by 50 basis points. The governor of the Bank of Ireland believes that it should be brought up to 3.5% as soon as possible.

Weekly trading plan for GBPUSD and EURGBP

I suppose the GBPUSD should continue falling. If the price breaks out the support at 1.2, it will be relevant to add up to the shorts entered at 1.221. Following a correction, the EURGBP uptrend could resume. I recommend buying the euro versus the pound with a target at 0.91.

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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