The Bank of England is simultaneously tightening and easing monetary policy. Its titanic efforts to stabilize the market contribute to both strong growth and decline of the GBPUSD. Let us discuss the Forex outlook and make up a trading plan.
Weekly pound fundamental forecast
You have three days! Sounds like an ultimatum. However, Andrew Bailey was talking about the imminent completion of the $65 billion QE program. According to the Bank of England’s head, bond purchases are temporary. They were necessary to stabilize the financial markets. It seemed to have worked out, but as soon as the QE completion date got closer, the life of investors became chaos again. UK bond yields soared while GBPUSD fell to a two-week low.
The Bank of England found itself in a unique situation. Its officials are trying to understand whether central banks can tighten and ease monetary policy at the same time. On the one hand, the BoE needs to calm the financial markets. On the other hand, to suppress inflation. According to the IMF, UK inflation in 2023 will be 6.3%, the highest among the G7 countries.
Inflation forecasts in the G7
Source: Financial Times.
BoE has a lot of work to do. Pressure increases due to the high probability of a recession. History shows that regulators suspend monetary restrictions when the economy begins to experience serious problems. In other words, rates go up until something breaks. The Fed says it is ready to sacrifice the economy to beat down the highest prices in decades. In fact, its officials are rushing to bring borrowing costs up to 4.5%, only to pause later while the US economy is strong.
Judging by the drop in the UK unemployment rate to 3.5%, the labor market is also strong, while the country is able to withstand aggressive monetary restrictions. The futures market expects the interest rate to rise by 100 bps in November. On paper, this should support the GBPUSD. However, the intention of the Bank of England to abandon QE has a stronger effect on the pound.
The UK financial markets sell-off could force BoE to return to asset purchases. Two weeks is not enough. Moreover, two interventions with an interval of 24 hours at the beginning of the week ending on October 14 prove that investors’ life is far from calm.
GBPUSD tested the bottom thanks to a Financial Times insider that the BoE may return to the QE program. Other bankers have argued that the UK regulator is considering a more flexible approach to avoid a crisis in the pension market.
The need to tighten and loosen monetary policy is bad for the central bank’s efficiency. The Fed has no such problems, so the US dollar looks stronger than the sterling. However, the risks of increased volatility remain elevated.
Weekly GBPUSD trading plan
The release of US inflation data can trigger strong GBPUSD fluctuations. Thus, it is reasonable to exit part of the short trades entered at the level of 1.1225 and take profit. A necessary condition for the downtrend recovery is the inability of the pound to rise above $1.115. Until that happens, focus on sales.
Price chart of GBPUSD in real time mode
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