Pound recovers from the shock. Forecast as of 31.08.2023

2023.08.31 2023.08.31
Pound recovers from the shock. Forecast as of 31.08.2023logo

The trade shock ruined the UK economy. Due to the war in Ukraine, the energy crisis, and Brexit, wages, prices, and interest rates have risen. But gradually, the country comes to the norm. How does this affect the GBPUSD? Let us discuss the Forex outlook and make up a trading plan.

Weekly Pound fundamental forecast

The UK domestic data send mixed signals, and the GBPUSD traders have nothing but to go with the flow. The UK economy grew faster than expected in the second quarter, consumer confidence increased, and government borrowing was significantly lower due to strong tax revenues. At the same time, the UK PMI has dropped to the lowest level since early 2021, retail sales have declined, and unemployment has risen. Contradictory data made the pound jump up and down before the currency reaction reflected the foreign environment.

In fact, the UK economy is suffering from a major trade shock. Its imports have become much more expensive than exports due to the war in Ukraine, the associated energy crisis, and new trade barriers due to Brexit. Not surprisingly, unlike other G7 countries, it has not really recovered from the pandemic.

Dynamics of UK economy 

    

Source: Financial Times

The trade shock resulted in a rise in wages, inflation, and borrowing costs. The economy has slipped into stagflation, combining a downturn in GDP growth with high prices. Not surprisingly, the economic data are contradictory. They dramatically change the expected ceiling in the BoE rate. Sometimes it exceeds 6%, sometimes it falls below 5.8%. Unsurprisingly, the sterling got tired of such staggering up and down and found an outlet. The pound is now driven by foreign news. 

Disappointing data on US consumer confidence, jobs, layoffs, private sector employment, and GDP pushed down Treasury yields, dropped the chances of the Fed’s 2023 tightening cycle resuming below 50%, and allowed the GBPUSD to reach level 1.27.

The pound value didn’t stay above the indicated level as a headwind blew from Europe. Despite the acceleration of Spanish and French inflation and stronger German CPI  data compared to forecasts, the euro took a step back and dragged other currencies and dragged other European currencies, including the pound, down. The reason is in Governing Council hawk Isabelle Schnabel’s statement that the prospects for the euro-area GDP growth are much weaker than expected. 

Dynamics of inflation in euro-area countries 

  

Source: Bloomberg

The currency bloc has a similar environment to the UK; it develops in conditions of stagflation. Therefore, the reduced chances of rate hikes in both regions due to the threat of a recession is a bearish factor for both the euro and the sterling. At the same time, both currencies are pro-cyclical. They strengthen as the global economy picks up pace. And that seems to be a long way off.

Weekly GBPUSD trading plan

In my opinion, a cooldown in the US jobs market will almost convince investors that the Fed’s monetary tightening cycle is over and further weaken the dollar. Therefore, the disappointing employment data for August will encourage investors to increase the GBPUSDlongs entered at 1.2615. Otherwise, provided the US jobs market remains strong, the price should continue declining. I suggest the first scenario is more likely,

 

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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