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The pound has surpassed the US dollar to become the year’s top-performing G10 currency. The reason for this is more than the reduction of divergence in economic growth. Let’s discuss that and make a trading plan for GBPUSD.
Monthly fundamental forecast for pound sterling
The announcement of the British general election date was a sigh of relief for the pound. According to law, they must be held by January 28, 2025, and speculation about the exact dates created uncertainty, which could have been more desirable for GBPUSD. The elections are scheduled for July 4, which increased the pound’s two-month volatility, but all other indicators, including inflation, dropped, giving bulls a tailwind.
British pound volatility
Source: Bloomberg.
Looking at the slowdown in consumer prices in the UK from 3.2% to 2.3%, Rishi Sunak said that this signaled an important milestone for the economy, with inflation returning to target levels. However, the April statistics could be better news for the Prime Minister. They take the option of a June repo rate cut off the table. After the important release, the futures market reduced the odds of the BoE starting a monetary expansion in early summer from 50% to 18%.
Inflation in the UK is lower than in most G7 countries except Italy, and Japan has yet to release CPI figures for April. This should weaken the pound; after all, higher consumer prices relative to the US and the eurozone caused it to rise earlier in the year. What is the reason behind this?
UK inflation rate
Source: Reuters.
The world’s leading central banks are concerned about the sustainability of services inflation. In the UK, it stands at 5.9%, in the US at 5.3%, and in the EU at 3.7%. Given these figures, the derivatives market’s expectations of a repo rate cut in November sound reasonable. The Bank of England’s monetary policy easing may start in August, but derivatives doubt this timing.
As a result, the pound has benefited from the BoE indecisiveness again and from a lower degree of political uncertainty. The Labour party tops the ruling Conservatives by 20 points in opinion polls, and their policy seems more attractive to investors. This includes closer ties with the European Union.
British political party ratings
Source: Financial Times.
GBPUSD was also supported by the second rise in manufacturing activity above the critical 50 level in at least 12 months, signaling an expansion. Although the services sector slowed from 55 to 52.9, the economic recovery in the UK is gaining momentum. This gives the Bank of England time to consider cutting interest rates and gives the pound a shoulder to lean on.
Monthly trading plan for GBPUSD
Reduced political uncertainty in the UK, the BoE’s hesitancy, and an improving economy allow GBPUSD to move confidently toward the previously outlined targets of 1.283 and 1.3. Long positions opened at 1.25 can be held, and one can open more on pullbacks.
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