Pound was deceived. Forecast as of 10.08.2023

2023.08.10 2023.08.10
Pound was deceived. Forecast as of 10.08.2023logo

The BoE was expected to hike the rate to 6.5%. However, the forecasts for the bank rate have been down to 5.5-5.75%. The GBPUSD drop in August looks natural, but the pound bulls still have hope. Let us discuss the Forex outlook and make up a GBPUSD trading plan.

Pound fundamental forecast today

Although speculators used to buy the pound betting on the BoE interest rate potential growth to 6.5%, the GBPUSD failed to continue the rally. The UK weak economy can’t afford a strong currency, and the GBPUSD trend could turn down soon unless there is a lucky chance.

As expected, the hawkish position of the Bank of England, which raised the interest rate for the 14th time to the current 5.25%, and a weak US jobs report allowed the GBPUSD to rebound from the zone of 1.2615-1.263. However, the unfavorable environment and low forecasts for the UK GDP discouraged the GBPUSD bulls.

The estimates of the National Institute of Economic and Social Research for the coming years are worse than those of the Bank of England. NIESR refers to the negative impact of Brexit, the war in Ukraine, the aggressive monetary tightening of the BoE; it expects the UK GDP to expand by 0.3% in 2023 and 0.4% in 2024. Inflation this year will be 7.7%; next year, it slow down to 4.1% but won’t return to the target either in 2025 or 2026.

Forecasts for UK GDP

Source: Bloomberg.

In addition to the slowest growth in retail sales in 11 months reported by the BRC, such pessimistic gauges made the pound lose its popularity. The derivatives market predicts a 25-basis-point increase in the BoE rate to 5.5% at the September meeting of the regulator with a probability of 60%. The chances that the Bank rate will remain unchanged are 40%. At the same time, Barclays, BNP Paribas, and UBS now see only one rate hike before the end of the monetary tightening cycle. In their opinion, the BoE rate ceiling is at 5.5%, and not 5.75%, as the derivatives market expects.

However, too high expectations eventually weakened the pound. Just a month ago, the gap between the expected peak rates in the UK and the US seemed huge. However, the slowdown in UK inflation has changed the optimistic views on the sterling. Hedge funds have been cutting net longs for the second week in a row, and asset managers have halved their pound longs from record levels. However, the positioning remains bullish. Together with the UK economic weakness and the growing risks of an early end of the BoE monetary restriction cycle, this will press the sterling down.

According to the BoE chief economist Huw Pill, monetary tightening is already having an impact on the economy. At the same time, inflation will fall to 5% by the end of the year, which is lower than the forecast by the Bank of England.

Dynamics and forecasts for UK inflation

Source: Bloomberg.

GBPUSD trading plan today

July report on consumer prices will surely influence the GBPUSD. However, the US inflation report comes first. If the CPI meets the Bloomberg forecast, one could add up to the longs entered at 1.2615-1.263 betting on the rally towards 1.285 and 1.29. Otherwise, it will be relevant to sell.

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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