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The favorable period for the GBPUSD bulls was short. The cooling of the UK labor market has given rise to speculation that the Bank of England will begin to reduce the interest rate before August. Let us discuss the Forex outlook and make up a trading plan.
Weekly Pound fundamental forecast
UK jobs report did everything possible to ensure that GBPUSD quotes collapsed from the zone of seven-month highs. However, signs of an improving economy and inflation remaining at elevated levels are making local assets attractive to foreign investors and helping the pound recover. Moreover, markets believe that the speed of monetary expansion of the Bank of England will be less than that of the Fed and the ECB.
Average wages in the UK have been slowing for the past five months, and the unemployment rate has risen to 3.9%, indicating a cooling labor market and allowing the BoE to breathe a sigh of relief. However, Andrew Bailey says he is no longer as concerned about the impact of wages on inflation. According to the head of the UK Central Bank, a sharp rise in unemployment is not required to slow down consumer prices.
Dynamics of unemployment and wages in the UK
Source: Bloomberg.
Bank of America believes that the labor market will remain strong, the economy will recover, and high volumes of UK bond issues against the background of the Bank of England’s QT program will lead to an increase in their yield and push GBPUSD to 1.37. Indeed, the demand for UK debt securities is off the charts. With £3.75bn of 10-year benchmarks sold, bids were 3.61 times higher. Capital inflows are supporting sterling.
On the contrary, Bloomberg predicts a further slowdown in wages and rising unemployment. The cooling of the labor market will make it possible for the interest rate to decrease as early as May, although summer looks like a more likely period for the start of BoE monetary expansion. Derivatives give a 50% chance that this will happen in June and are completely certain that it will start in August. The scale of monetary easing is estimated at 68 bps in 2024. This is less than that of the Fed and the ECB, which in theory should help the pound against the US dollar and euro.
Dynamics of market expectations for rates
Source: Reuters.
The future of GBPUSD will depend on the FOMC’s forecasts for the federal funds rate and UK inflation. The release of consumer price data seems to be a more significant event than the Bank of England meeting. There is a market belief that an increase in the minimum wage could accelerate CPI on a monthly basis but slow it to less than 3% annually. This will be a strong blow for sterling, as everyone understands the role of temporary effects.
Weekly GBPUSD trading plan
The further dynamics of all dollar pairs depend on whether the Fed wants to stick to its December forecasts of three acts of monetary expansion in 2024. If the updated estimates show a figure of 5% and UK inflation slows down significantly, enter short trades in the direction of 1.27. In other scenarios, the pair may rise above 1.29. However, while it is consolidating, sell the pound on the rise to $1.287 and buy on the decline to $1.275.
Price chart of GBPUSD in real time mode
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