There are always two currencies in any pair. No matter how weak the UK economy is, a GBPUSD rally is possible amid a drop in US Treasury yields. Let us discuss the Forex outlook and make up a trading plan.
Weekly Pound fundamental forecast
The pound is playing foreign drivers. The GBPUSD bulls take advantage of a drop in Treasury yields and do not notice negative news on the UK economy. Otherwise, the pound versus the US dollar would have risen higher. However, other currencies also strengthen under these circumstances.
The latest IMF forecasts have once again convinced that the UK economy is stuck in stagflation. According to the International Monetary Fund, UK GDP will grow by 0.5% in 2023 and by 0.6% in 2024. Inflation, on the contrary, will remain elevated. Consumer prices are expected to rise 7.7% this year and 3.7% next year. This is higher than in other G7 countries and requires a continuation of the monetary tightening cycle.
IMF forecasts for advanced economies
Source: Financial Times.
The good news is that the IMF does not expect GDP to contract, such as in Germany. In addition, it does not require the Bank of England to increase the Bank rate to 6%. One rate hike by 25 basis points and an increase in borrowing costs to 5.5% will be enough.
However, neither investors nor the BoE itself are at all sure of the advisability of such a step. Besides, average wages for new and temporary employees have slowed to their lowest level in 2.5 years, according to research from KPMG and the Recruitment and Employment Confederation. Only Catherine L. Mann remains hawkish; she once again called for raising interest rates due to inflation remaining at elevated levels for a long time. Such consumer price trends may negatively affect inflation expectations.
In contrast, another MPC member, Swati Dhingra, believes that if the economy cools more than the central bank expects, a dovish shift and easing of monetary policy will happen sooner than markets expect. In her opinion, the UK economy has so far experienced only 20%-25% of the impact of the Bank rate increase.
Thus, the GBPUSD rally results from a weak dollar, not a strong pound. The primary question is whether the upward movement in Treasury yields will continue or not. On the one hand, the markets are moving into a new regime of high rates, which will most likely last for a very long time. On the other hand, a serious slowdown in US inflation amid a freezing US economy will force the Fed to start monetary easing eventually. The IMF predicts a decrease in the growth rate of the US CPI to 4.1% in 2023 and to 2.8% in 2024.
Weekly GBPUSD trading plan
In fact, inflation might be slowing down even faster. Bloomberg experts’ forecast suggests a slowdown in US consumer prices to 3.6% in September. If the indicator turns out to be even lower, GBPUSD could rise to 1.24, 1.2475, and 1.253. Traders should move from short-term purchases to medium-term sales when the price rebounds down from the indicated levels.
Price chart of GBPUSD in real time mode
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