Pound remembers old pains. Forecast as of 23.02.2023

2023.02.23 2023.02.23
Pound remembers old pains. Forecast as of 23.02.2023logo

While an improvement in the UK domestic data support the GBPUSD growth, the strength of the US dollar and the talks on the Northern Ireland protocol discourage the pound bulls. Let us discuss the Forex outlook and make up a trading plan.

Weekly fundamental pound forecast

The pound’s response to the UK PMI report means only one thing. The currency is tired of negative. For too long, every expert has been saying that the UK economy is the worst in the G7, that the recession will be protracted, and that the country’s economy will not return to its pre-pandemic levels until 2026. When there is too much negative, it is easy to produce good news. Will the GBPUSD trend turn up?

The UK PMI reports turned out to be a pleasant surprise. Composite PMI soared to 53 from 48.5, exceeding the forecasts of all Reuters experts. For the first time since June, the 50 mark was exceeded, indicating an expansion of GDP, and a steady rise in prices allowed the derivatives market to fully believe in a 25-basis-point rate hike at the next meeting of the Bank of England and raise the expected ceiling on the borrowing costs. This resulted in rising UK bond yields and a rally in the GBPUSD.

Dynamics of expected ceiling of BoE interest rate

  

Source: Bloomberg.

The sterling strengthening was also facilitated by the information about the UK budget surplus in January of £5.4 billion, with an expected deficit of £7.8 billion due to higher income tax revenues. Such a trend suggests the strengthening of public finances and encourages the  Chancellor of the Exchequer, Jeremy Hunt, to go ahead. He has room to maneuver, being able to finance short-term tax cuts or increases in budget spending.

However, GBPUSD bulls have been set back. As the ideas of the first three quarters of 2022 return to Forex, the strength of the US dollar wins over any currency. Few people now remember about the recession and slowdown in inflation, which led to the fall of the USD index at the beginning of 2023. On the agenda are the rise of the US economy and a higher than anticipated ceiling of the federal funds rate. Investors wonder if the US economy is really as strong as the latest domestic data show and whether inflation will slow down.

The pound is also pressed down by the negotiation process between London and Brussels regarding the protocol on Northern Ireland. While the media claim that a deal is soon to be struck, disputes remain. The EU is not going to rewrite the document. it is ready to improve its implementation. Ardent supporters of Brexit in the UK parliament are ready to cancel the protocol and draw up a new withdrawal agreement. As soon as old troubles return, the sterling weakens.

Weekly GBPUSD trading plan

I suppose the further GBPUSD trend depends on the answer to the question, was the surge in economic activity in the US in January noise, or can we talk about a new trend? If the February employment and inflation data are weak, investors will be willing to sell the dollar. Until that moment, the GBPUSD will tend to consolidate in the range of 1.19 – 1.22. One could sell it on growth or buy it on a decline to one of the borders of the trading corridor.

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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