The acceleration of monetary restriction leads to the strengthening of the currency. However, this does not apply to GBPUSD. Fears about an imminent deep recession in the UK contribute to the pair’s decline. Let us discuss the Forex outlook and make up a trading plan.
Monthly pound fundamental forecast
Despite leaving the EU, the UK remains part of Europe, which suffers more than anyone else because of the war in Ukraine. It is difficult to expect an energy crisis not to accelerate inflation and lead to a recession when gas prices are 14 times higher than the average over the past decade. As a result, the prospects for the pound look very gloomy, but the GBPUSD bulls are trying to get the most out of the situation.
Investors are focused on stagflation and recession, which makes the Bank of England an outsider. As gas prices rise, previous inflation forecasts look outdated. The market was recently shocked by the BoE’s prediction of consumer prices rising to 13% in 2022. Bank of America and Goldman Sachs analysts now expect CPI to rise to 14% and 15% by January, while Citi experts warn that inflation will reach 18.6%.
Annual inflation expectations soared to 12.7%. The BoE failed to reduce them, so the futures market expects the UK regulator to aggressively tighten monetary policy. According to forecasts, the interest rate will rise from 1.75% to 3% by November, up from 2.6% just a week ago.
Dynamics of inflation expectations in the UK
Source: Bloomberg.
Alas, GBPUSD cannot benefit from increased BoE aggression. Investors are confident that monetary tightening will trigger a recession surpassing the 2008 crisis. Analysts at Baringa Partners say the looming recession will impact households more than it did 14 years ago. The reason is the increase in electricity prices by more than three times in winter compared to last year. The drop in business activity to an 18-month low also suggests that a recession will hit the UK. With a labor shortage and weak demand, the manufacturing sector is shrinking, while the service sector cannot compensate for its losses.
Dynamics of UK business activity
Source: Financial Times.
The situation is exacerbated by uncertainty about the future prime minister and the echo of Brexit. As EU steel import quotas were exhausted earlier than expected, UK producers will have to pay a 25% tax when selling goods to Northern Ireland. It is a paradox since they will be charged fees for selling within their own country. This fact causes discontent and increases political risks for the pound.
Monthly GBPUSD trading plan
The 12.5% decline of the analyzed pair since the beginning of the year indicates that many negative factors have already been priced in GBPUSD quotes. Therefore, some sellers will want to take profits, increasing the correction risks. It is highly doubtful that the war in Ukraine will end in 2022 and the rise in gas prices will stop. In this regard, JP Morgan and Danske Bank’s forecasts of 1.14 and 1.13 look realistic. The first short’s target of 1,187 worked out. Continue to use the GBPUSD correction to enter sales towards the second target at 1.16.
Price chart of GBPUSD in real time mode
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