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GBPUSD changes are based on market expectations for the Federal funds rate and interest rate. They are formed based on economic and inflation data. Let’s discuss the Forex outlook and make up a trading plan.
Weekly Pound fundamental forecast
For most of the year, investors were satisfied that the Bank of England would cut rates later and less aggressively than the Fed and ECB. However, the SNB’s unexpected monetary easing, a serious slowdown in UK inflation, dovish statements by Andrew Bailey and the refusal of MPC hawks from their plans caused GBPUSD to fall to 1.25. However, the bulls were able to move ahead.
Sterling’s decline from almost $1.29 in early March looked impressive. However, this should not seem unexpected. A month ago, derivatives gave only a 15% probability of a decrease in the interest rate in June. Now the chances have increased to 60%. This is approximately the same as for the Fed. Moreover, the strong US manufacturing PMI for March reduced expectations for the scale of the Fed’s monetary expansion to 65 bps in 2024. Expectations for the Bank of England are 70 bps.
It’s all due to inflation. In the UK, it is steadily moving downwards, but in the US, in January-February, it began to accelerate unexpectedly.
Inflation in major world economies
Source: Wall Street Journal.
This shouldn’t be surprising. The American economy is very strong at the moment. A leading indicator from the Atlanta Fed forecasts its growth of 2.8% in the first quarter, while UK GDP is unlikely to reach 1%. In a weak economy, there is a greater chance of consumer prices slowing down to the 2% target than in a strong one.
It is puzzling why derivatives estimate the overall scale of monetary expansion by the Fed and the Bank of England in 2024 and later almost identically. The derivatives market believes that the Federal funds rate will fall from 5.5% to 3.6% at the end of the cycle, and the interest rate from 5.25% to 3.25-3.5%. Does anyone really think that the war in Ukraine will end quickly, and the European economy will boost afterwards? Then why are lower rates expected in the eurozone?
Dynamics of expected rates at the end of monetary expansion cycles
Source: Financial Times.
Thanks to American exceptionalism, Fed officials will ease monetary policy more slowly than the Bank of England and will start later. Most likely, the Fed funds rate will be reduced not in June, but in September. The sooner the markets understand this, the sooner they will return to GBPUSD sales.
American employment data will be published on April 5, and inflation data will be published on April 10. If a strong US economy does not force the Fed to abandon its plans for monetary easing in 2024, then an acceleration in consumer prices may do so.
Weekly GBPUSD trading plan
The upward rebound of GBPUSD is technical in nature. It is associated with the exiting of short trades prior to the release of important US macroeconomic reports. The pair’s rebound from 1.2695 or its return below 1.2615 will be reasons for entering sales.
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.
