When inflation continues rising, it is time to move from caution and gradualism to decisiveness. The Bank of England is about to raise the bank rate by half a point for the first time since 1995. How will the GBPUSD respond to the BoE decision? Let us discuss the Forex outlook and make up a trading plan.
Weekly pound fundamental forecast
The BoE may raise the bank rate by 50 basis points, like the other 70 regulators that have done the same in 2022. Inflation in Britain hit a 40-year high of 9.4% and is likely to continue accelerating to 11% and more. It is high time to move to active steps. Andrew Bailey used to hint at an aggressive rate hike.
The derivatives market gives an 80% chance of an increase in the BoE rate from 1.25% to 1.75% at the MPC August meeting. 70% of the 65 experts polled by Reuters expect such an outcome, and neither do 30 out of 43 large banks surveyed by Bloomberg. Markets believe in the highest rate hike since 1995, having prices in this scenario in the GBPUSD. If the Bank of England continues raising the rates by only 25 basis points, the pound will head for $1.2.
Otherwise, more aggressive monetary tightening will support the sterling in the short term. Derivatives expect 255 basis points of cumulative rate hikes by the Bank of England and 320 basis points by the Fed in 2022. The BoE has already raised the rates by 115 basis points. Taking into account the 50 basis points in August, there will be about 100 basis points left. The Fed has the same. Based on the pace of monetary tightening, the GBPUSD situation will hardly change dramatically unless other factors, such as recession, interfere.
Dynamics of interest rates of world’s leading central banks
Source: Bloomberg.
Unlike the US, which has already experienced a technical recession but is far from a real one, in the UK, the situation is exactly the opposite. According to The National Institute of Economic and Social Research, the decline in the UK GDP has already begun and will last until early 2023. The average real disposable incomes will decrease by 2.5% in 2022 and remain 7% below the pre-pandemic level until 2026. It is also estimated the number of households living from paycheck to paycheck will almost double to 7 million by 2024.
It is quite a gloomy outlook, unlike the forecasts of Bloomberg experts, who see A 50% chance of a recession within the next twelve months.
Dynamics of recession chances in UK
Source: Bloomberg.
The future decisions of the Bank of England will be influenced not only by the state of the economy but also by politics. Much depends on who exactly becomes the new prime minister. Liz Truss promises to cut taxes, which will support the GDP but will accelerate inflation and, most likely, will force the BoE to act more aggressively. Rishi Sunak made the fight against high prices his top priority.
Weekly GBPUSD trading plan
If the BoE rate rises by a quarter of a point, the GBPUSD will go down, and one could add up to the shorts entered at 1.2285. If the borrowing costs go up by half a point or more, one could exit a part of sell trades, although the pound’s growth potential looks limited at least until the US jobs report is published.
Price chart of GBPUSD in real time mode
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