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Although the BoE has started monetary tightening, the interest rate is currently 100 bps lower than the federal funds rate. Isn’t it time for the Bank of England to speed up? How will this affect the GBPUSD? Let us discuss the Forex outlook and make up a trading plan.
Weekly pound fundamental forecast
The failed mini-budget of the Liz Truss government and the related crisis in the UK financial markets seemed to cheer up the Bank of England. Its officials took drastic measures, temporarily restoring the QE, launching repo operations, and then shutting down QE despite expectations of extending its terms. Finally, BoE intends to switch to classic QT, that is, to sell bonds to tighten financial conditions and beat inflation. Are the markets ready for this? How will the GBPUSD react to such a radical move?
Inflation must be fought resolutely. If you delay, like BoE, it is easy to lose investors’ confidence. Andrew Bailey and his colleagues started raising borrowing costs in December 2021, three months before the Fed. However, currently the federal funds rate is 3.25% and the interest rate is only 2.25%. Delays have dangerous ends. While consumer prices in the US are slowing down, they accelerated to a 40-year high of 10.1% in the UK in September.
Inflation dynamics in the UK
Source: Financial Times.
The Bank of England urgently needs to accelerate monetary restriction. Its officials intend to be the first of the world’s major regulators to start QT, getting rid of bonds worth £838 billion, and raising the interest rate in early November by almost 100 bps. The Fed only lets its securities mature and does not reinvest the proceeds from their disposal in the amount of $95 billion per month, but does not sell treasuries either. ECB officials are just thinking about launching QT as in the US from early 2023. So BoE is a role model now.
Theoretically, the acceleration of monetary tightening is bullish for the GBPUSD. However, the UK debt market has only recovered from the turmoil due to the new government’s failed fiscal stimulus. How will it react to a further rise in bond yields? Will the Bank of England have to suspend QT?
Other important factors to consider are undermined confidence in UK assets, a deterioration in global risk appetite, which caused the fall in US stocks, and the high probability that a recession in the UK will start earlier than in the US or the eurozone.
Dynamics of GBPUSD and S&P 500 futures
Source: Bloomberg.
Watching the GBPUSD in the next couple of weeks will be very interesting. A possible increase in interest rates by 100 bps at a meeting on November 3 can strengthen the pound. However, much will depend on the external background and the state of the UK economy. Also, do not forget about the potential turmoil in the financial markets associated with the start of QT.
Weekly GBPUSD trading plan
Be ready for any movements of the pound. Sell GBPUSD in case of a breakout of supports at 1.1175 and 1.108. Enter purchases in case of a breakout of the resistance at 1.136.
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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