All means are good for victory. This is probably what the candidate for UK Prime Minister Liz Truss thinks, criticizing the Bank of England. What will her victory mean for GBPUSD? What other drivers affect the pair? Let us discuss the Forex outlook and make up a trading plan.
Weekly pound fundamental forecast
While candidates for the PM position are trying to accuse the Bank of England of increasing inflation, the pound is steadily growing. However, the GBPUSD rally depends more on the weak US dollar than on the strong sterling. The improvement in global risk appetite against the backdrop of a slowdown in US inflation has led to certain results. For example, the greenback failed to cope with actively rising stock and bond prices. Its main competitors took advantage of this situation.
Liz Truss blames Andrew Bailey and his colleagues for everything, as Donald Trump attacked Fed Chairman Jerome Powell for raising rates. According to Truss, BoE officials are to blame for inflation hitting 40-year highs, as the BoE was too late and slow to fight rising prices. The BoE was one of the first among the world’s major central banks to dust off the mantra about temporary inflation and began to raise interest rates ahead of the Fed. If the Bank of England had begun to tighten monetary policy even earlier, with the economy not yet recovered from the pandemic, it would have caused 800,000 job cuts.
Dynamics of central bank rates
Source: Bloomberg.
Liz Truss promises to oblige the BoE to control the money supply and real GDP. Regulators had done this before but stopped in the 1970s. Theoretically, this could lead to new monetary and fiscal stimulus and support the economy in the short term. However, future generations will pay the price for temporary benefits. In this regard, the victory of the Minister of Foreign Affairs seems to investors as a bullish factor in connection with the subsequent selling of the GBP on growth in the medium and long term.
However, not everyone agrees with this. Societe Generale believes that the Fed’s monetary restriction will be higher than that of the BoE so that GBPUSD will return to the 1.2 level shortly. After the release of US inflation data, doubts on this issue are actively growing. If US consumer prices peak and UK prices continue to accelerate to 13%, Washington has more reasons to slow down monetary tightening than London.
Forecasts and dynamics of UK inflation
Source: Bloomberg.
The Bank of England is unlikely to abandon its initial approach of a gradual interest rate increase with an eye to GDP. This is confirmed by chief economist Huw Pill, arguing that the regulator is not trying to provoke a recession but is looking for a reasonable balance.
Weekly GBPUSD trading plan
The market underestimates the speed of the Fed’s monetary restriction, which may cause GBPUSD sell-offs. A break of support at 1.218 is a reason to enter short trades.
Price chart of GBPUSD in real time mode
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