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By abandoning the negative rates policy, the Bank of Japan appeared dovish to the markets. The SNB even reduced borrowing costs. As a result, the yen and franc went down. The pound also joined them due to BoE’s actions. Let’s discuss the Forex outlook and make up a trading plan for GBPUSD.
Weekly Pound fundamental forecast
Since the beginning of the year, sterling has been challenging the US dollar for leadership in the G10. For a while, the GBP was even the leader due to expectations that the BoE would not rush to ease monetary policy. After its March meeting, only hawks adhere to this position. Doves and centrists emphasize that reducing the interest rate does not require a drop in inflation to 2%. This circumstance increases pressure on GBPUSD and pushes the pair towards the monthly bottom.
The BoE’s forecasts of a slowdown in inflation to 2% in the second quarter, the dovish rhetoric of its officials and the refusal of two hawks to raise the interest rate became a real curse for the pound. BoE officials chose the wrong time for the meeting. On the same day, the SNB, unexpectedly for the financial markets, lowered the key rate from 1.75% to 1.5%, signing a death sentence for the franc. In turn, the Bank of Japan’s intention to adhere to an ultra-easy monetary policy against the backdrop of abandoning negative rates drowned the yen.
Investors rushed to the US dollar due to the weakness of its competitors. Before the March BoE meeting, the derivatives market was counting on a decrease in the interest rate in August and 1-2 acts of monetary expansion in 2024. After that, expectations for the start shifted to June, and the scale increased to 75 bps (the same as for the Fed). Unsurprisingly, the revaluation contributed to the collapse of GBPUSD quotes.
Dynamics of market expectations regarding the scale of monetary expansion
Source: Bloomberg.
At one point, derivatives gave a 20% chance that the Bank of England would ease monetary policy at its next meeting, compared with 10% for the Fed and ECB. Sterling immediately sank against both the US dollar and the euro.
Chances of interest rate cuts
Source: Bloomberg.
MPC Member Catherine Mann saved the situation. She said the market is overconfident about three acts of monetary expansion in 2024. The Bank of England is unlikely to take the first step before the Fed since UK core inflation is higher than in the US. Such rhetoric allowed derivatives to reduce the possibility of the start of the BoE monetary easing in June from 65% to 54%, while the chances of August are 84%.
However, you need to understand that Catherine Mann is a hawk who recently voted for an increase in the interest rate. But monetary policy is controlled by doves and centrists. At the same time, Capital Economics’ forecast that UK inflation could fall below 2% as early as April and to 0.5% by the end of the year makes the position of BoE officials as uncomfortable as possible. If they start first, GBP will turn from a beautiful swan into an ugly duckling.
Weekly GBPUSD trading plan
In such conditions, the GBPUSD sales strategy remains valid. Hold and periodically add up to short trades entered at 1.276. For example, in case of acceleration of US PCE or breakout of supports at 1.259 and 1.2575. Levels 1.25 and 1.238 serve as targets for downward movement.
Price chart of GBPUSD in real time mode
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