The sterling has been jumping up and down recently. Strong UK domestic data made it one of the best performers among G10 currencies, while weak reports weakened the currency. Let us discuss the Forex outlook and make up a GBPUSD trading plan.
Monthly fundamental pound forecast
Don’t count your chickens before they are hatched. A few days ago, Andrew Bailey said that the Bank of England will face an easier task in 2023 than in 2022, but a series of weak UK domestic data makes traders doubt the truth of his words. Yes, the derivatives market still believes that the BoE interest rate will be raised by 50 basis points in February, but as Jefferies put it, it will be a dovish half-point. The risks of a recession have sent the GBPUSD down.
It’s one situation when inflation slows down for two months in a row, GDP in October-November shows robust growth, gas prices fall, and positive news from China sets up a positive mood. And it is a different situation when the UK PMI has declined at the fastest pace in two years, British manufacturers have cut prices by the maximum amount since April 2020, and business confidence has weakened just like during the 2008-2009 global crisis. Corporations give various reasons, including the increase in the interest rate, weak domestic demand, strikes, and the echoes of Brexit. Still, the outcomes are the same – the economy looks weak and will fall into recession at some point.
Business activity in advanced economies
Source: Reuters.
Unlike in the euro area, where business activity moved out of the red for the first time since June, it appears that the UK has not been able to reap any benefits from falling gas prices and the resulting reduction in the risk of an energy crisis. The derivatives market, after the release of a series of weaker economic reports, reduced the expected increase in the BoE interest rate to the ceiling from 105 basis points to just under 100 basis points. It still expects to see a peak at 4.5%, which is 25 basis points above the Reuters consensus.
At the same time, derivatives are betting on the BoE dovish shift in September. It seems to be a hard way to go. In the first half of the year, the regulator will weigh between the need to press down inflation and the unwillingness to drive its own economy into recession. In the second half, it will have to puzzle over whether it is worth easing monetary policy or not.
Derivatives market projections for BoE interest rate
Source: Bloomberg.
Thus, the greatest contrast arises between the euro area and the UK. Business activity in the first pleases, in the latter, upsets. The Bank of England continues to be hesitant and nervous, and the ECB is confident in the need to increase the interest rate by 50 basis points at each of the first two meetings in 2023. This allows the BBVA to issue a 0.9 bullish forecast for the EURGBP in the coming weeks. ING also believes in its growth, arguing that expectations of the BoE rate hike to 4.5% are overstated, in contrast to the forecast for the growth of the ECB deposit rate to 3.25%. Its ceiling looks too low.
Monthly GBPUSD trading plan
In my opinion, it’s all about the bad weather in the UK. As soon as it starts to improve, the pound will strengthen, and the GBPUSD will continue its uptrend towards the previously set targets at 1.268 and 1.28. The trading recommendation is to buy.
Price chart of GBPUSD in real time mode
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