It doesn’t really matter how much the BoE raises the bank rate in November, by 75 basis points or 50 basis points. The environment in which the central bank makes decisions is challenging, and the deterioration in global risk appetite presses down the GBPUSD. Let’s talk about these topics and draw up a trading plan. Let’s discuss it and make a trading plan.
Monthly fundamental forecast for GBPUSD
When making any decision, it is essential to keep a cool head. When a verdict is delivered in an extremely unfavorable environment or in a state of shock, there is a high probability of making a mistake. The Bank of England faces a challenging task. It must decide how high to raise the bank rate in a stagflationary environment and uncertainty about the government’s future fiscal policy. This circumstance, along with the Fed’s actions the day before, sent down the GBPUSD.
46 out of 53 Reuters experts predict that borrowing costs will rise by 75 bp in November, which will be the widest BoE move since 1989. The interest rate will rise to 3%, the highest level since 2008. The derivatives market estimates its ceiling in the current monetary restriction cycle at 4.8%. It is pretty high, although the forecast now is significantly lower than at the time when Liz Truss announced a new fiscal stimulus package. Then, the interest rate ceiling reached 6%.
Dynamics of expectations of BoE peak rate
Source: Bloomberg.
However, the pound’s rise, the stabilization of financial markets, and the alignment of fiscal and monetary policies in the UK brought back the idea of a half-a-point rate hike. It is important how the MPC members will vote. The most likely scenario among economists polled by Bloomberg is 7 to 2 in favour of a wider step, but a 6 to 3 option is not ruled out.
In November, the Bank of England is to release updated forecasts for GDP and inflation. However, due to the appearance of the new government plan only on the 17th, it will take blind decisions. Rishi Sunak and Jeremy Hunt will obviously prioritize tax increases and spending cuts to cover the £40-billion budget deficit, but BoE will not have a clear idea of their plans.
The task of the central bank is complicated by a pronounced stagflationary environment. Inflation in the UK is hovering near 40-year highs, and the PMI drop to its lowest levels since January 2021 clearly hints at a recession.
Dynamics of UK economy
Source: Bloomberg.
Let’s not forget that the pound is highly sensitive to global risk appetite, and the deterioration of the latter due to the Fed’s hawkish stance presses down the GBPUSD.
After all, there is an assumption that a significant part of the negative has already been priced in the sterling quotes. Stagflation and recession have been talked about for a long time, and the fact that the bank rate ceiling is further than that of the federal funds rate may support the GBPUSD in the medium term.
Monthly trading plan for GBPUSD
In the meanwhile, it makes sense to continue selling the GBPUSD amid the US dollar strengthening as a safe haven. The market easily reached the targets at 1.14 and 1.137 suggested earlier. The new downside targets are 1.115 and 1.105. The smaller is the BoE rate hike in November, the faster these targets will be reached.
Price chart of GBPUSD in real time mode
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