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Due to the slowness of the Bank of England in reducing the interest rate, the active QT implementation and the high attractiveness of UK assets, the GBPUSD bulls took the initiative into their own hands. Let us discuss the Forex outlook and make up a trading plan.
Weekly Pound fundamental forecast
The strength of a currency depends not only on a strong economy but also on the attractiveness of the assets denominated in it. Just as the US dollar is supported by high demand for securities of American technology companies, the pound is supported by UK bond yields. It is higher than that of German, French, and even Greek counterparts. If you invest money in Europe, it is better to go to the UK debt market. Capital inflows are keeping GBPUSD afloat.
Dynamics of European bond yields
Source: Bloomberg.
As a rule, the reason for rising bond yields is a monetary tightening or a strong economy, which is not the case in the UK. In the second half of 2023, a recession began in Britain, although Andrew Bailey called the decline insignificant. Just like the Fed and other regulators, BoE is set to cut rates. However, the slowness of the UK regulator is one of the advantages of GBPUSD.
The Federal Reserve is expected to begin three acts of monetary expansion in June. Derivatives forecast that the BoE will begin monetary easing in August and will lower the interest rate at two meetings to 4.75%. In theory, this should equalize the yields of UK and US bonds and deprive GBPUSD bulls of important support.
Rising losses from bonds purchased as part of QE are forcing the Bank of England to actively reduce its £735 billion balance sheet. There was an initial profit of £124 billion, which the government spent. However, since 2022, the QE program has caused losses of £49.4 billion, which taxpayers must cover. It is expected that net losses could exceed £100 billion over the life of QE. Unsurprisingly, the BoE is actively reducing its balance sheet, which leads to higher yields and the attractiveness of British bonds.
BOE balance sheet dynamics
Source: Bloomberg.
What is important is the fact that Andrew Bailey and his colleagues are getting rid of bonds faster than other major central banks. Thus, the Bank of England’s balance sheet has already shrunk by 8.4% from its peak, the Fed’s by 4.8%, and the ECB’s by 3.9%.
The speed of QT and the slowness of BoE’s monetary expansion are the strongest drivers of sterling growth. GBPUSD bulls set back only after a continuous 7-day rally. The US dollar is still strong, but its main trump cards in the form of gradual convergence of market estimates with FOMC forecasts for the rate and American exceptionalism have already been priced in the USD quotes. This allows its opponents to strengthen.
Weekly GBPUSD trading plan
Thus, the medium-term prospects for GBPUSD look optimistic. If US PCE helps the bulls break out the resistance at 1.269, then in this case, add up to the long trades entered at 1.26. Otherwise, use downward corrections for entering purchases.
Price chart of GBPUSD in real time mode
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