The Bank of England has succeeded in bringing down inflation while also reducing expectations of further increases in the repo rate, weakening the pound. However, policymakers are now highlighting the risks of a renewed surge in consumer prices, providing fresh support for GBP/USD quotes. Let’s examine the factors driving the pair and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The Bank of England has brought inflation under control.
- Markets are underestimating the likelihood of a repo rate hike.
- A reversal in capital flows is supporting the pound.
- Weak NFP data will offer an opportunity to add to existing long positions opened at 1.32.
Daily Fundamental Forecast for Pound Sterling
Time will tell whether the Fed’s tight-lipped approach under Kevin Warsh is effective. For now, the Bank of England is reaping the benefits of a directly opposite approach. The MPC members’ hawkish rhetoric helped slow UK inflation to 2.8% in May, the lowest figure in over a year. The central bank has moved away from easing monetary policy and has shifted its focus to keeping rates steady. It has achieved its goal, and the GBP/USD pair has responded accordingly.
Against the backdrop of a significant slowdown in consumer prices, the Bank of England’s forecasts seem like a shot in the dark, but what matters is the result. Inflation is approaching the 2% target, and Andrew Bailey continues to drive it down with his rhetoric. The BoE governor acknowledges the economy’s weakness but notes that combating high prices remains a priority. A rate cut is out of the question; as for what happens next, we will have to wait and see.
BoE’s Inflation Forecast
Source: Bloomberg.
According to Andrew Bailey, the UK economy generally looks better in the first half of the year than in the second. Measures to curb energy prices have a short-term effect. Inflation may accelerate in the future. The drop in Brent prices to pre-war levels means nothing. According to the Bank of England governor, oil is his least preferred indicator. Moreover, second-order effects from CPI growth could easily feed into core inflation. Employees will aggressively demand wage increases, and the rise in food prices occurs with a time lag.
Andrew Bailey’s largely hawkish rhetoric is causing investors to question the signals from the futures market. Prior to his speech in Sintra, Portugal, derivatives markets had ruled out the possibility of the Bank of England raising its repo rate in 2026. Now the odds of monetary tightening are rising, leading to a rally in GBP/USD quotes. This is especially true given that Kevin Warsh’s statement about progress in the battle against inflation reduces the likelihood of aggressive Fed monetary tightening.
Adding fuel to the pound’s rally is the reluctance of soon-to-be Prime Minister Andy Burnham to make any drastic changes. Investors had been selling British assets due to fears of a political crisis, but are now beginning to buy them on hopes of political stability.
Changes in monetary policy and capital flows suggest a reversal of the downtrend in the GBP/USD pair. However, for this to be confirmed, the US economy would need to show signs of weakness. The first warning sign could come from the BLS’s June US employment report.
Daily Trading Plan for GBP/USD
Strong employment and unemployment data will allow the Fed to tighten, offering investors an opportunity to sell the GBP/USD pair with a target of 1.325. Conversely, weak data will provide an opportunity to add to long positions formed at 1.32.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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