Although the GBPUSD crash was triggered by the Bank of England, the pair continued falling amid the US strong jobs report. Will the pound resume rising after such shocks? Let us discuss the Forex outlook and make up a GBPUSD trading plan.
Weekly fundamental pound forecast
The pound is the currency of emotions. It jumped up and down amid the Brexit negotiations between London and Brussels. It crashed to an all-time low after the Liz Truss government announced a fiscal stimulus package. It surged when the stimulus package was rejected, and Rishi Sunak became the UK Prime Minister. Sometimes the emotions are so high that they make the sterling a G10 leader, as it was in January. Nevertheless, the mind, sooner or later, outweighs emotions. The weak UK economy sets back the GBPUSD bulls.
According to the IMF, the UK GDP rate in 2023 will not only be the lowest of all in the G7, but it will even be lower than in Russia. The UK economy will fall into a recession. Namely, the downturn must have begun last year and will continue this year. The energy crisis, the most aggressive monetary restriction in decades, as well as tax increases and the echoes of Brexit, press down the UK economy. And while the BoE’s expected decline in the gross domestic product of less than 1% this year is not significant compared to its more than 5% downturn during the 1980 and 2008 recessions, the outlook remains negative.
IMF forecasts for G7 economies
Thus, the BoE expects stagnation and a return of the economic expansion rate to pre-pandemic levels only by 2026. It is not surprising that two out of nine members of the Monetary Policy Committee at the February meeting voted to keep the interest rate at the same level. In their opinion, if the BoE goes too far with monetary tightening, it can finally drown the economy, which is barely afloat.
However, the Bank of England still raised the interest rate by half a point to 4%, the highest level since 2008. The market regarded these 50 basis points as dovish and lowered the expected bank rate ceiling to 4.25%, pressing down the GBPUSD. Next, the US jobs report for January further weakened the sterling. The pair dropped to a monthly low, significantly exceeding the downside target of 1.22 indicated in the previous article.
Thus, unlike in the US, where the economy seems to be strong and inflation has probably peaked, things are different in the UK. A pronounced stagflationary scenario is going on there, with high prices and a sluggish economy. The reasons are the war in Ukraine and the associated energy crisis in Europe, and the rupture of economic ties due to Brexit. The UK trade has been hit much stronger than previously expected.
Dynamics of UK-EU trade in goods
Weekly GBPUSD trading plan
Still, when the expectations are negative, it is much easier to provide positive news. That is why the pound can resume growing amid the Chinese economic recovery and a rise in the global risks appetite. Still, I don’t think the pound will strengthen significantly until the second or third quarter. It will be relevant to sell the GBPUSD in the short term unless the price breaks out the resistances at 1.217 and 1.221
Price chart of GBPUSD in real time mode
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