Pound takes part. Forecast as of 16.03.2023

2023.03.16 2023.03.16
Pound takes part. Forecast as of 16.03.2023logo

The better performance of the UK economy than expected and the greater stability of the UK banking system compared to the US and euro-area ones suggest a positive outlook for the GBPUSD. Let us discuss the Forex outlook and make up a trading plan.

Weekly fundamental pound forecast

Everything is interconnected in the financial markets, and the pound has not been left out of the turmoil due to failures in the US banking system. Once similar problems started in Europe, the fall in Credit Suisse shares weakened the sterling versus the dollar but strengthened its position against the euro. Investors may have thought that the UK banking system is stronger than in the euro area, but their reasoning should be seen as a temporary factor. Much more important for the GBPUSD is the answer to the question of whether the panic in the markets will make the BoE move away from the plan to raise the interest rate.

Just a week ago, derivatives gave out a 90% chance of a rate hike at the March meeting of the Bank of England. Now the chances of a 25-basis-point rate increase have fallen to 40%, while the probability of maintaining it at the same level of 4% has increased to 60%. Investors believe that Andrew Bailey and his colleagues will attach more importance to market fluctuations than fiscal stimulus from the Chancellor of the Exchequer, Jeremy Hunt.

Dynamics of expectations for BoE interest rate

Source: Bloomberg.

Under normal conditions, the decision of the Treasury to invest £20 billion a year in the UK economy might be perceived as an argument in favor of further inflation acceleration and a reason to continue the BoE monetary tightening cycle. However, the current conditions are unusual. The banking crisis began in the USA, and Europe did not stand aside.

The new draft budget looks optimistic. The government, seeing positive developments in the UK economy, which the IMF considers the worst among the G7 countries, and the Bank of England does not predict its recovery to pre-pandemic levels before 2026, proposed new tax benefits for business investment, decided to increase military spending and provide financial support to individuals who decide to return to work.

Dynamics of economic performance in UK, USA, and euro area


Source: Financial Times.

According to the UK Office for Budget Responsibility (OBR), UK GDP in 2023 will decline by a modest 0.2%, which is significantly better than the previous forecast of -1.4%. Inflation is expected to fall from the current 10.1% to 2.9% by the end of December. The numbers look very optimistic and encourage Jeremy Hunt to claim that the UK economy proves its strength.

When the banking system looks stronger than in the US and the euro area and the economy is stronger than expected, the Bank of England could continue its monetary tightening cycle, supporting the pound. This scenario will be more likely if the Fed begins to deal with the problems of US credit institutions and keeps the markets believing in a dovish shift.

Weekly trading plan for GBPUSD

In this scenario, it makes sense to buy the GBPUSD if the price breaks out the resistance at 1.2115. The continuation of the banking crisis and similar problems in other countries and regions will make it relevant to sell the GBPCHF and GBPJPY with targets at 1.095 and 156.5. On the contrary, if the Fed and other regulators manage to resolve the problems quickly, it will be relevant to buy EURGBP.

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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