The Bank of England and the Fed were tightening their monetary policies at different paces, which determined the GBPUSD downtrend. The situation has started changing after the FOMC’s meeting at the end of July. How will that affect the pair? Let’s discuss it and make a trading plan.

Weekly fundamental forecast for pound sterling

The quieter you go, the further you reach. The story of the hare and the tortoise describes the current balance of power in the GBPUSD quote. Although the BoE started tightening monetary policy earlier, it raised the REPO rate by 115 basis points. The federal funds rate grew by 225 basis points over a shorter period, dropping the sterling against the USD to its lowest since the pandemic started. However, when the self-confident hare — the Fed — decided to pause, the tortoise had a chance to improve the situation. Thus, the sterling came close to the level of $1.22.

Andrew Bailey and his peers delay raising borrowing costs as the UK economy is recovering slower than other developed countries after Covid-19 because of Brexit and the energy crisis. At the same time, inflation is expected to rise to 10.5%, according to the IMF’s latest estimation. The IMF also predicts that the UK’s GDP growth will be the weakest among the G7 countries in 2023, so the Bank of England’s hands are tied.

Interest rates evolution

Source: Bloomberg.

G7 countries’ GDP

Source: Bloomberg.

Even if the Governor of the Bank of England thinks the REPO rate may be raised by 50 basis points in August, only 26 out of 54 Reuters experts believe that. Twenty-nine experts expect a 25-point rate hike, so the BoE is expected to keep its tortoise pace.

The Fed has not slowed down monetary restriction yet, but Jerome Powell hinted at probably doing so at the FOMC press conference in July. Then, the GBPUSD bears fixed profits on GBP shorts, and a correction developed. Hedge funds had started closing shorts in GBP in the week ending 19th July.

Dynamics of speculative positions in pound

  

Source: Bloomberg.

Neither the weakness of the UK economy nor the competition between Conservative leadership candidates Rishi Sunak and Liz Truss bewilders the GBPUSD buyers. While Liz Truss accused Rishi Sunak of having led the country into a recession due to hikes in employment tax, the former Chancellor of the Exchequer criticized his opponent for large fiscal stimuli that would boost soaring inflation, which is at its 40-year peak already. 

A strong dollar is the main reason for the GBPUSD’s dive to its deepest since March 2020. The greenback exploited such factors as a divergence between monetary policies and economic growth paces. However, the States could be in recession now like Great Britain. The Fed’s intention to change resolution for gradual actions will deprive the USD of its main trump.

Weekly trading plan for GBPUSD

Markets could be engaged in wishful thinking: the Fed may not fall asleep like the hare from the fairy tale. The US regulator is likely to tighten monetary policy faster than the Bank of England, and the GBPUSD could be sold on retracements from resistance at 1.2245 and 1.2285.

Price chart of GBPUSD in real time mode