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The first part of the confrontation between the Federal Reserve and the Bank of England ended in favor of the GBPUSD bulls. They have recovered from the impact of inflation and are preparing for a BoE response. Let us discuss the Forex outlook and make up a trading plan.
Daily Pound fundamental forecast
After the turmoil in financial markets provoked by the Bank of Japan and the Federal Reserve, investors are wary of meetings of other central banks. On March 21, London may become a new hot spot, where Bank of England officials will announce their verdict. They are unlikely to change the interest rate from the current 5.25%, but the slowdown in UK wages and inflation could result in a dovish surprise. Will it signal the end of the favorable period for GBPUSD?
The pound remains one of the best-performing currencies on Forex, as many here act cautiously. The slower a central bank moves along the road of monetary expansion, the better for its currency. In this regard, sterling’s successes until the end of the second decade of March looked logical. As a result, derivatives signaled the start of a BoE easing cycle in August compared to June for the Fed and ECB.
However, a slowdown in UK consumer prices from 4% to 3.4% YoY in February (the lowest level in two and a half years), core inflation from 5.1% to 4.5%, and service prices from 6. 5% to 6.1% could be a game changer.
UK inflation dynamics
Source: Reuters.
Prior to the March BoE meeting, the derivatives market gives a 60% probability of easing monetary policy in June and expects three acts of monetary expansion. The same as from the Fed. The chances of a federal funds rate cut in June are about 75%. This should have deprived the GBPUSD bulls of their main trump card, but the Federal Reserve intervened.
According to Jerome Powell, the moment when borrowing costs begin to fall is close, and the acceleration of US inflation in January-February does not change the central bank’s outlook. This, together with the FOMC’s December Fed Funds Rate forecasts, weakened the US dollar against major currencies and allowed GBPUSD buyers to regain the initiative. It should be noted that the market is bullish towards sterling, as a result, net long positions have reached a record level.
Dynamics of GBPUSD net long positions
Source: Reuters.
How will the Bank of England respond to the Federal Reserve? At the previous MPC meeting, six members voted to maintain the interest rate at 5.25%, two voted for its increase, and one for a decrease. Markets now rely on 7-1-1 voting. However, the number of doves may be higher, or Andrew Bailey may signal an imminent start of monetary easing. In that case, the favorable period for GBPUSD will end sooner than buyers would like. Record sterling long trades can become a real curse for GBPUSD.
Daily GBPUSD trading plan
The strategy of buying on decline turned out to be correct, although the pound sank deeper than expected. Without dovish surprises from the Bank of England, add up to GBPUSD long trades. A necessary condition for this is the pair staying above 1.276. Otherwise, switch to short trades.
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 LiteFinance. 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.
