The Bank of England has to make a difficult choice. The regulator will either signal an interest rate hike to curb inflation or keep borrowing costs unchanged and support the UK economy. What will the BoE choose? Let us discuss the Forex outlook and make up a GBPUSD trading plan.
Weekly pound fundamental forecast
The expectations for the central bank’s rate hike in 2022 should strengthen the local currency. Money markets expect the BoE to raise the interest rate twice, in May and December next year. However, the pound is trading down. The GBPUSD has dropped to monthly lows, whose breakthrough will send the price lower. The BoE can influence the pound trend, so investors naturally focus on the central bank’s September meeting.
Speculators have become net sellers of the sterling for the first time since December 2020. They worry that the interest rate hike will set back the UK economy, which is still weak. The pandemic fallout and Brexit have left household budgets in serious trouble amid rising prices, an energy crisis, and the end of the Treasury fiscal stimulus programs. The lack of labour force and goods creates problems for business. The UK economy risks facing stagflation, which is not the best time to buy the pound.
Dynamics of GBPUSD and pound speculative positions
Source: Bloomberg
There seem to be much more barriers to the UK economic recovery than earlier expected. The recession from which the UK growth has to recover is still the deepest among the advanced economies, so hedge funds are not willing to invest in the GBP. Speculators fear that, unlike the Fed, the Bank of England will give a dovish surprise.
Difference between current and pre-pandemic GDP levels
Source: Bloomberg
At its previous meeting, the BoE suggested that tightening monetary policy would be required to contain inflationary pressures. Looking at the acceleration of consumer prices to 3.2% in August, the highest level since 2012, one could assume that in September, the Monetary Policy Committee should signal a soon interest rate hike. In fact, the situation is more complex. The most recent data on the GDP rate, retail sales, and PMI look disappointing. The monetary restriction doesn’t seem to be relevant when the economy is facing a downturn.
Furthermore, the pound is quite responsive to changes in global risk appetite. The S&P 500 correction affects the GBPUSD bulls in the same way as the UK economic recession. In this regard, the growth of the US stock indexes in response to the September FOMC meeting’s results is good news for the sterling. The equities must have been bought on the fact after a sell-off on the news about the Fed’s willingness to start monetary normalization.
Weekly GBPUSD trading plan
If the BoE sounds optimistic about the economic growth, featuring a downturn, and signals an interest rate hike in 2022, the GBPUSD will go towards 1.3675, 1.3725, and 1.3755, where one should sell the pair on the rebound from resistances. Otherwise, the regulator’s pessimism will result in the downtrend continuation towards 1.348 and 1.341.
Price chart of GBPUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
