The GBPUSD rally to seven-month highs could not go unnoticed, even if the pound has been in the shadow of the euro and the yen for a long time. Let’s talk about the reasons for its growth and the prospects for GBP.
Quarterly fundamental pound forecast
Haste makes waste. While at the turn of 2022-2023, investors were being focused on the rapid rally of the euro and the yen, the pound slyly rose to the highest levels since June versus the US dollar amid weak reports on US retail sales, producer prices, and industrial production. American exceptionalism is a thing of the past. However, the GBPUSD bulls go ahead not only because of the dollar weakness; there are some other reasons for the sterling rally.
The slowdown in the UK consumer prices to 10.5% in December compared to 10.7% in November and 11% in October did not discourage sterling buyers. The indicator may have passed its peak, however, most likely, it will remain at elevated levels for a long time. In addition, core inflation remained unchanged at 6.3%, exceeding Bloomberg experts’ forecasts, which, coupled with wage growth of 6.4% in the three months to November, does not allow the Bank of England to relax. The regulator should continue monetary tightening. At its first meeting in 2023 in February, according to the expectations of the derivatives market, it will raise the bank rate by half a point to 4% for the 10th time in a row. Derivatives estimate the implied interest rate ceiling at 4.53%.
Divergence in the monetary policy of the Fed and the BoE underlies the uptrend in GBPUSD. The Fed is closer to the end of the monetary restriction cycle due to a faster slowdown in inflation in the US than in the UK.
Dynamics of inflation in USA and UK
Source: Wall Street Journal.
According to Deutsche Bank, monetary policy is not the only reason for the pound’s strengthening. Five months ago, the GBPUSD drop could be explained by the UK current account deficit of 7.6% of the GDP and a sharply negative yield on the UK bonds. Currently, the UK foreign trade is improving, and the real yield on 5-year bonds has been up by 175 basis points since August. The UK attracts foreign investors, and Deutsche Bank projects the GBPUSD to rally up to 1.28 by the end of 2023.
Nonetheless, there are always two currencies in any Forex pair. Weaker US domestic data have a mixed effect on the US dollar. On the one hand, the Fed can well slow down the monetary tightening pace and so deprive the US dollar of such an advantage as American exclusivity. On the other hand, it drives the demand for the US dollar as a safe haven. If bad news from the economy continues to be perceived as bad by the US stock indexes, the GBPUSD rollercoaster as on January 18 will be repeated from time to time. At least until the market takes a unified position.
Quarterly GBPUSD trading plan
In my opinion, even if, in the short term, the GBPUSD starts a correction or enters a state of consolidation, it should be bought on the medium and long-term investment horizon. The upside targets are 1.263 and 1.28.
Price chart of EURUSD in real time mode
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