How does the UK government intend to finance the fiscal stimulus program? How high will the Bank of England raise the interest rate? These questions remain open and prevent the GBPUSD from continuing its rally. Let us discuss the Forex outlook and make up a trading plan.
Weekly pound fundamental forecast
It is amazing how the Bank of England calmed not only the British but also the global bond markets by resuming QE. It is no less surprising how the government, with the collapse of the pound to a historical bottom, abandoned a part of the fiscal stimulus plan. The BoE spent a modest £3.7bn out of a possible £20bn to buy assets in the early days, while the Treasury’s refusal to cut income tax for the rich amounts to only £2bn out of a $45bn program. A drop in the ocean. Although the market situation has returned to normal, the problems remain.
Despite the impressive six-day GBPUSD rally, major banks doubt it will last long. Standard Chartered and Royal Bank of Canada predicted a 10% decline by the end of the year. Nomura and Morgan Stanley experts believe the sterling will drop below parity against the US dollar. At first glance, this idea looks outdated, but Jefferies analysts note that the GBPUSD is moving so fast that the pair can drop to 1.1.
Pound dynamics
Source: Bloomberg.
The consensus forecast of Reuters experts suggests that in a month, the sterling will fall to $1.09. In six months, it will rise to $1.1, and in a year, it will be $1.16. Part of this movement is explained by the strong position of the US dollar. According to 47 out of 55 respondents, the USD has not yet reached its growth ceiling. 25 out of 46 economists believe that this will happen within half a year, 17 of them predict the ceiling will be reached within three months, three within a year, and one predicts that a year will not be enough to stop the USD.
The pound’s positions look more vulnerable. While the recession has already begun or is about to begin, targeted support for households hit by the energy crisis could lead to slower inflation growth. The CPI ceiling expected by the Bank of England will be lower, and its officials will not raise the interest rate above 3.25-3.5%, as expected by the futures market.
The government’s loud statements that tax cuts will accelerate GDP growth do not impress sterling buyers. Liz Truss doesn’t say how she plans to get the public finances in order. This is not good for people’s trust. Following S&P Global Ratings, Fitch downgraded the outlook for the UK credit rating. This has affected the mood of investors considering whether to invest in UK assets.
The UK really needs money! The country must finance a current account deficit of more than 7% of GDP. Real bond yields are still very low, which reduces their attractiveness. The Bank of England needs aggressive rate hikes to push it up. This could cause the recession to deepen and the pound to fall.
Weekly GBPUSD trading plan
Thus, despite recent gains, GBPUSD bulls’ positions look vulnerable. The pair’s inability to return above 1.1475 or break out support at 1.1225 could be reasons to enter short trades.
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.
