The GBPUSD future looks gloomy because a quarter of the national debt is owned by foreign investors who are fleeing the UK. The collapse of the bond market and the impending financial crisis forced the Bank of England to intervene. However, will the UK regulator help the pound? Let us discuss the Forex outlook and make up a trading plan.
Weekly pound fundamental forecast
After Liz Truss became Prime Minister, the UK faced a financial crisis. The enormous growth in bond yields, triggered by massive fiscal stimulus from the Treasury, led to the GBPUSD fall to a historical low and mass panic. The Bank of England stepped in to reassure investors, but will it help the pound?
When foreign investors hold 25% of the government debt, bond yields are extremely sensitive to their desire to find new markets, that is, to leave the UK. Massive sell-offs have raised rates on long-term bonds, which has created big problems for pension funds. During the low-yield era, funds used the LDI mechanism. Strategies for buying derivatives to secure pension benefits are under threat now. It was necessary to deposit additional funds to maintain positions, and the UK faced the threat of insolvency and a financial crisis.
The Bank of England intervened in time. With a £5bn bond purchase offer followed by an announcement to expand QE to £65bn by mid-October BoE, the UK regulator got tough on speculators. They will definitely not go against the regulator. On the other hand, the BoE’s intention to go along with the government gives rise to rumors that the regulator will eventually finance it by printing money, something its officials have previously promised not to do.
The BoE’s dovish reversal put QT on hold, shocked financial markets but did not solve the problem. When the government is trying to boost the economy with incentives, and the central bank is trying to lower demand and fight inflation, nothing good will come of it. The IMF believes so, arguing that a synchronous policy is required at the present stage of the development of the world economy.
UK inflation dynamics
Source: Financial Times.
There are two ways to resolve the situation. The revolutionary one implies a sharp increase in the interest rate to 6% expected by the futures market by spring 2023. With the evolutionary approach, the government says that the stimulus package is designed for two years, and most of it will be used next year. Bank of England continues the QE. According to a Bloomberg insider, Kwasi Kwarteng does not intend to abandon his plans and is counting on BoE.
Weekly GBPUSD trading plan
The GBP’s future will depend on what level of UK bond yields foreign investors accept as appropriate. When will they stop running from the market and come back? This will likely continue for a long time, keeping the pound under pressure. In such a situation, sell GBPUSD on growth, followed by a price rebound from resistances at 1.1, 1.112, and 1.117.
Price chart of GBPUSD in real time mode
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