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When will central banks start monetary policy easing? How low are they ready to cut their rates? The answers to these questions and the improvement in the global economy determine the trajectories of currencies in the Forex market. Let’s discuss the Forex outlook and make up a trading plan for GBPUSD.
Monthly Pound fundamental forecast
While the Fed guarantees a soft landing for the US economy and the ECB is urged to cut interest rates to keep the eurozone out of recessionary risks, the UK has already slipped into a recession. The Bank of England needs to loosen its monetary policy aggressively. However, markets give only a 70% chance of a repo rate cut in June, compared to a 90% chance for the ECB. The probability that the Fed will begin to cut the interest rate in early summer has fallen to 18% amid accelerating US inflation. As a result, the GBPUSD pair experienced a massive collapse.
Market expectations for central banks’ rates
Source: Bloomberg.
In 2024, investors will focus on monetary policy and global economic recovery. Before the release of the US CPI for March, the GBPUSD pair posted gains during four of the last six trading days due to the growing popularity of pro-cyclical currencies. Positive news from China, the eurozone, and the UK prompted talks of an improvement in the global economy, especially since the WTO forecasts that international trade will accelerate to 2.6% in 2024 and 3.3% in 2025 unless the authorities throw a spanner in the works.
The pound sterling fans are disappointed that monetary policy prevails in the battle against a pro-cyclical improvement in the global economy. A cut in the Federal Funds rate, not just this summer but during 2024, is in doubt after the third consecutive month of accelerating US inflation. In fact, the CPI is expected to rise further in the second half of the year due to the low base effect of late 2023. Moreover, with the presidential election on the horizon, the Fed may try to avoid accusations of being a monetary expansionist in favor of the incumbent administration.
It comes as no surprise that the futures market is pricing in a range of 45 bp for this year. In other words, there could be a rate cut in one or two FOMC meetings. For the ECB, the figure is 85 bps, and for the UK, it stands at 70 bps. However, the UK economy looks weaker than the European one. Curiously, the yield spreads of local bonds over their German counterparts are far from the 5-year averages.
UK and Germany government bond yield spread
Source: Bloomberg.
The market is likely underestimating the extent of the BoE’s monetary easing. If that is the case, then UK debt is highly appealing. The record demand for 20-year and 3-year bonds confirms this. In contrast, demand for 10-year gilts at auction left much to be desired. Investors are demanding higher yields, which is related to the Fed’s postponement of starting monetary expansion.
Monthly GBPUSD trading plan
Thus, the different pace of monetary easing and the Bank of England’s moves ahead of the Fed confirm that GBPUSD may continue to nosedive to 1.24 and 1.23. Consider keeping your short trades formed from 1.2695 open and adding more trades on pullbacks.
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.
